Is property really a good hedge against inflation? Maybe not
Indicator: UK CPI
Updated 21 May 2013
What is it?
The UK CPI (consumer price index) is the most widely-used indicator of Britain's cost of living. Many believe it moves in line with house price inflation.
What's the latest?
April UK CPI was up 2.4% year-on-year. That's down from March's 2.8%, but it's still above the Bank of England's 2% target. Meanwhile, RPI – the retail price index, which includes housing costs - was up 2.9% on a year ago, compared with 3.3% in February.
The April Nationwide UK house price index has risen to 0.9% year-on-year.
What does this mean for UK house prices?
Here's the (maybe surprising) answer: probably bad news. Higher CPI normally means interest rate hikes that translate into more costly home loans. That can cut both housing demand and prices. The only real exception in the last 15 years has been mid-2009 to mid-2010, when despite CPI rebounding, the bank rate has been held at a record low 0.5%.
Despite the broad downtrend in UK CPI since 2010, inflation is still too high. It may drop more in the meantime, but the historic relationship of higher CPI = less UK house price inflation will re-establish itself at some point.
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