It will not have escaped anybody’s attention in recent months that inflation is up. Record oil prices have given us almost daily increases in petrol costs and soaring energy bills. Food prices are also on the rise, again reflecting a global commodities boom. So, inflation is at 3% on the official consumer prices index and 4.2% according to the retail prices index, and is set to rise further in the coming months - possibly by a lot. The squeeze on household budgets is on.

Mervyn King, the governor of the Bank of England, has been attracting headlines with his observation that the “nice” decade - noninflationary, consistently expansionary - is over. He, however, thinks inflation on the official target measure will peak at less than 4% before heading down. In contrast, some in the City think we are in for a much nastier inflation shock. Tim Bond, head of asset-allocation strategy at Barclays Capital, wrote last week: “We have no reason to expect the inflation outcome over the next few years to be much different from the outcome in the 1970s.” To remind you, Britain’s inflation rate topped 27% in 1975.

The housing market is thus in an unaccustomed position, certainly as far as prices are concerned, even if Bond’s assessment is much too gloomy. For years, we have had soaring house prices against a backdrop of low general inflation. “Real”, inflation-adjusted house prices thus rose sharply. Now we have falling housing prices in an environment of rising general inflation, which means real house prices are falling more sharply than cash prices.

Rising inflation, in one respect, makes life more difficult for the housing market, constraining the Bank of England from cutting interest rates. At a time when lenders have not been passing on official rate cuts anyway, propping up the market through aggressive cuts is not a route open to the authorities even if they wanted to do it.

On the other hand, a bit of inflation makes the house-price adjustment a little easier. Rightmove reported last week that asking prices have risen by 1.2% this month. The figures are probably distorted by the mix of properties coming onto the market, but were enough to prompt an exasperated Miles Shipside, Rightmove’s commercial director, to comment: “New sellers can see the storm clouds overhead, but seem to believe it’s only raining on other people.” He thinks that until sellers are more realistic in setting prices, the market will atrophy.

Unless desperate to sell, however, most people will not voluntarily slash their prices. A bit more general inflation is helpful in that it does it for them by disguising what is happening to real prices. (Over time, just as in the 1970s, it will reduce the real value of people’s mortgage debt, which many would welcome, but that’s another story.)

The Halifax’s house-price measure is not necessarily the most representative, but combine its year-on-year price fall of 3.7% in April with 4.2% retail-price inflation and you have an 8% real drop in a year. This is the way house-price adjustments happened in the past. A bit of general inflation helps to smooth the process.

home.economics@sunday-times.co.uk

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