U.K. Inflation Cools, But House Prices Race Ahead | Pound Ridge Homes

The annual rate of inflation in the U.K. fell in July and is likely to continue cooling, but house prices are heading in the opposite direction, stoking fears of a new housing market bubble.

The Office for National Statistics said annual inflation slowed to 2.8% in July from 2.9% in June, aided by smaller rises in prices for items including airfares and clothing than a year earlier.

Economists said inflation is likely to continue falling this year and next, easing pressure on household budgets that have been squeezed for several years as wage growth has failed to keep pace with price increases.

Slowing inflation should help put a fledgling recovery in the U.K. economy “on a firmer footing,” said Rob Wood, chief U.K. economist at Berenberg Bank.

Economists added the anticipated slowdown in inflation toward the Bank of England’s 2% annual target should help Bank of England Gov. Mark Carney stick with a pledge to keep the central bank’s benchmark interest rate at a record low of 0.5% until joblessness falls to 7%, unless inflation looks poised to accelerate.

Unemployment averaged 7.8% in the three months to May, and the BOE doesn’t expect unemployment to hit the 7% target until 2016, a sign that it intends to keep British borrowing costs low for another two to three years to support recovery.

Yet even as price pressures in the economy overall are retreating, house prices are rising more sharply and broadly than in more than six years.

In the latest sign of housing market strength, the Royal Institution of Chartered Surveyors’ monthly house prices balance surged to 36 in July from 21 the previous month, the highest since November 2006 when it reached 42.

The balance is calculated by subtracting the proportion of surveyors reporting house prices falls from those who say prices rose. The rise in the balance indicates that the increase in house prices is becoming sharper and broader based.

While it remains some way below the peak in the series of 68.6 in September 1999, what is striking about the pickup is its speed. After a 32nd straight negative or flat balance in March this year, house price growth has surged sharply in just four months.

 

 

U.K. Inflation Cools, But House Prices Race Ahead – WSJ.com.