The latest inflation data from the Office for National Statistics (ONS) released on 14 January has revealed that the Consumer Prices Index (CPI) grew to 2% in the year to December 2013, down from 2.1% in November and at long last in-line with the Bank of England's official target for the first time since 2009. Despite inflationary fuel bills, discounting of food and non-alcoholic beverages were the largest indicators.
This cheery news of course does not include the impact of asset price inflation.
In a separate release the ONS has disclosed that in the 12-months to November 2013, UK house prices increased by 5.4% but the upward trend was substantially higher than this in London and the South East.
House prices have been rising more rapidly than average earnings, which in real terms remain below pre-crisis levels. Worryingly however household debt levels have been rising, highlighting a disconnect between the messaging of policymakers about the virtues of austerity at a government level and the impact of initiatives designed to encourage spending and boost the property market on personal balance sheets.
Despite bullishness over the recovery, the real picture is probably more fragile than some headlines suggest. The slew of positive economic data over the last 12-months has benefitted from the tailwinds of the last round of UK QE in 2012, ongoing highly accommodative interest rates and, let’s not forget, the temporary benefit for more than £12 billion of PPI claims being injected into the economy.
The big question is how long will ultra-low rates stay in place? Even a modest increase could be painful for those who have stretched themselves to purchase properties and/or adjusted to thinking ultra-low interest rates are ‘normal’.
The Bank of England has been at pains to communicate a dovish message but the markets are increasingly factoring in a rate rise over the next year while reportedly mortgage lenders are stress testing applicants.