and that the tightness of the UK labor market will push up inflation, the housing market is providing some offsetting pressures. The chart below shows the contribution of housing to UK inflation, with owner-occupier housing costs contributing positively to inflation and private rents contributing negatively. This is not the same as the cost of housing, which includes transactions in the market. The Bank of England’s monetary policy report has some great analysis of these issues, showing that the cost of housing is rising at around 3 per cent a year but the contribution to inflation is only around 1 per cent. This is because the weight of housing in the consumer price index is so much smaller than its weight in the economy. However, if the housing market does not recover soon, the contribution of housing to inflation could fall further, making it harder for the Bank of England to meet its inflation target. This is a big deal because housing is one of the largest components of the average household’s spending. It is also one of the most important components of the economy, with house prices and construction activity closely linked to consumer spending and business investment. The Bank of England’s latest inflation report has some interesting analysis on this issue, showing that the housing market is a key source of uncertainty for the UK economy. The Bank’s policymakers will be hoping that the recent slowdown in the housing market is temporary and that the market will pick up again soon. If not, they may need to consider more aggressive monetary policy action to keep inflation on track.
