May Inflation sees rates return to near long term averages

Here’s a detailed analysis based on the current Consumer Prices Index including owner occupiers’ housing costs (CPIH) and its components:

Consumer Prices Index and Housing Costs

  1. CPIH and CPI Trends:
    • The Consumer Prices Index including owner occupiers’ housing costs (CPIH) is currently at 2.8%.
    • Over the past 30 years, the Consumer Prices Index (CPI) has averaged around 2.5%.
  2. Owner Occupiers’ Housing (OOH) Costs:
    • OOH costs represent the expenses associated with owning, maintaining, and living in one’s home, excluding utility bills, minor repairs, and maintenance.
    • These costs are a significant component of household expenditure and are not included in the standard CPI measure.
  3. Current OOH Trends:
    • OOH costs are still rising, predominantly driven by increasing mortgage rates.
    • This reflects higher costs for homeowners, affecting overall housing expenditure and contributing to the CPIH.

Impact of Mortgage Rates

  • Mortgage Rates Influence on OOH:
    • Rising mortgage rates increase monthly payments for homeowners with variable rate mortgages or those coming off fixed-rate deals, leading to higher OOH costs.
    • This has a direct impact on the CPIH, as higher housing costs elevate the overall index.

Renting vs. Buying

  • Financial Times Analysis:
    • A recent FT Money article highlighted that renting is currently cheaper than buying a home, a trend not widely emphasized by housing advocacy groups like Generation Rent or Shelter.
    • This is primarily due to the high mortgage rates making home ownership more expensive compared to renting.

Graph Analysis and Historical Context

  • Long-Term Inflation Context:
    • Over the past 30 years, CPI has averaged around 2.5%, indicating relatively stable inflation rates with periodic fluctuations due to economic cycles.
    • The current CPIH rate of 2.8% is slightly above the long-term CPI average, suggesting a marginal increase in inflation, particularly influenced by housing costs.

Implications for Homeowners and Renters

  1. Homeowners:
    • Rising mortgage rates increase financial pressure on homeowners, especially those with adjustable-rate mortgages or those nearing the end of their fixed-rate period.
    • Higher OOH costs can strain household budgets, making it more challenging to manage overall living expenses.
  2. Renters:
    • With renting currently being cheaper than buying, renters may find it financially advantageous to continue renting rather than entering the housing market.
    • This trend could potentially lead to increased demand for rental properties, influencing rental prices over time.

Policy Considerations

  1. Interest Rates and Monetary Policy:
    • Central banks may need to consider the impact of interest rates on mortgage costs and overall housing affordability when setting monetary policy.
    • Balancing inflation control with housing affordability is crucial to ensure stable economic conditions.
  2. Housing Market Interventions:
    • Government policies aimed at stabilizing the housing market, such as subsidies for first-time buyers or incentives for affordable housing development, could help alleviate the financial burden on homeowners.
    • Measures to support renters, such as rent controls or housing benefit adjustments, could also be beneficial in the current economic climate.

Conclusion

The current CPIH rate of 2.8% reflects a slight increase over the long-term CPI average of 2.5%, primarily driven by rising OOH costs due to higher mortgage rates. This has made renting more financially viable compared to buying, a trend highlighted by recent financial analyses but not widely addressed by housing advocacy groups. Balancing inflation control with housing affordability remains a key challenge for policymakers in maintaining economic stability and supporting both homeowners and renters.

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