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February 26, 2010
House Prices Continued To Shine in January But The Inflation Cloud Is Gathering
House prices Continued To Shine in January But The Inflation Cloud Is Gathering
House prices rose by 1.2% in January and are up 8.6% year-on-year
Recent economic data has been a mixed bag for the housing market
Inflation uncertainties highlight interest rate risk
Nationwide recently reported that house prices made a rapid movement northwards in the first month of the year. Cash rich buyers chasing limited stock and a weak pound helped maintain the momentum that began last summer. Martin Gahbauer, Nationwide’s Chief Economist recently commented that whilst the pound’s depreciation has stimulated the market, there is increasing concern about levels of inflation.
Gahbauer stated that house prices strengthened their upward momentum at the start of 2010, increasing by 1.2% month-on-month in January. At £163,481, the average price of a UK property cost 8.6% more than a year earlier in January, up from 5.9% in December.
The Inflation Cloud Is Gathering
The overriding view from economists is that terest rates will remain unchanged until the final quarter of 2010 and possibly longer. However, Gahbauer believes that the inflation trends of 2009 are starting to call into question the validity of this view. Caused largely by a weakening pound and a rebounding of fuel prices, inflation has consistently been higher than analyst estimates, and hasn’t come close to the deflationary territory that was so widely feared at the start of 2009. Excluding the impact of the VAT cut and other tax changes, it did not fall below the MPC’s 2% target at any stage. Also, because inflation has been persistently higher than expected the inflationary impact of the weak exchange rate has been underestimated, or the degree of spare capacity in the economy overstated. Gahbauer believes if this is the case, then higher interest rates may be required sooner than is widely assumed.