Prices have risen by more than 5pc in the past year and there is growing unease at the Bank of England that inflation is here to stay even as the pandemic comes to an end.
The Consumer Prices Index is at the highest level since September 2011 on the back of rising petrol and household energy costs. This is well above the Bank of England’s 2pc target, and significantly higher than experts had predicted.
To combat this, the central bank raised interest rates from 0.1pc to 0.25pc in December. However, the rate rise may not be enough to bring down prices and there could be a series of further increases this year.
Inflation poses a looming threat for the housing market because it will push the Bank of England to raise interest rates.
Buyers would have less purchasing power when mortgages become more expensive, and this has already started with banks ditching record-low deals and upping rates.
Kay Neufeld of the Centre for Economics and Business Research, a consultancy, said: “Interest rates have been very low for an enormous amount of time in Britain. People aren’t expecting this. The psychological impact on the market could be big.”
Demand would drop at the same time many existing homeowners would suddenly find their housing debt becomes more expensive to service.
“There is a risk for anybody on a flexible rate or on a fixed term mortgage that is coming up for renewal,” said Mr Neufeld.