UK inflation increase could be good for house buyers

The UK’s Office of National Statistics released its inflation figures this morning with noted increases in both the Consumer Prices Index (CPI) and in the older, but more inclusive Retail Prices Index (RPI).

Figures for the CPI show that inflation accelerated to 2.5 percent in August, in the face of an expected levelling off from last month. At the same time the RPI increased from 3.3 percent in July to 3.4 percent in August.

In effect this gives the Bank of England a flag to raise interest rates at the next monetary policy committee meeting (MPC).  Last time the MPC met it voted to hold rates steady at 4.75 percent after an increase in August. The governor of the Bank of England, Mervyn King, hinted last at a 50/50 chance that inflation could rise above 3 percent over the next six months and possibly over the next two years if there was no correction.

The Bank is mandated to keep the inflation rate at 2 percent based on the CPI, should this rise above 3 percent then the BoE must write to the Chancellor, Gordon Brown to explain why. This would in effect be the equivalent of a stern rebuke for the Governor.

Perversely any increases in interest rates may come as good news for house buyers. As cost of borrowing increases the pressure on house prices to lower will be greater. For buyers who are coming out of short periods of low fixed interest rates, though, the news will come as a major worry. Those with expensive properties will be largely unaffected as generally they will have bought into the market some time ago and have low debts, or have traded up from previous properties.

The main winners are likely to be those trying to get into the first time property market and those moving up to the next property level. For these people, although their property may decrease in value, the property on the next rung up will likely decrease by similar or greater percentage – the difference in pricing thus being less.

We expect the MPC is now more likely to increase rates at its next meeting – if it doesn’t then we will expect the disparity between CPI and ‘Real’ costs of living to grow further apart – leading to calls to overhaul the system of measurement.