Is UK inflation proving stickier than expected and what could it mean for the housing market?

UK inflation remains stubbornly above the Bank of England’s 2% target, with the Consumer Prices Index (CPI) having risen 3.8% year-on-year in July, up from 3.6% in June. This isn’t what was predicted. This time last year, most economists were adamant inflation would gradually trend downwards as we moved through 2025.

The recent uptick has been driven largely by transport costs — particularly airfares, which have surged over 30%. The BoE now reckons inflation will peak at 4% in September, before easing towards 2.7% by the second half of 2026. Whether the Old Lady of Threadneedle Street’s predictions are correct or not is anyone’s guess. But those hoping to see a big drop in the immediate future – including housebuilders hoping lower inflation will lead to lower interest rates, which in turn should make their new homes more affordable - may be disappointed. Food prices continue to surprise on the upside, global trade disruptions and energy costs look as volatile as ever, and consumer expectations are still shaping price dynamics. All trends that could be with us for some time.

The housing market has been feeling the tremors of inflation and monetary policy shifts, but light at the end of the tunnel seemed to be emerging. Interest rates have fallen steadily over the past year, and the base rate now sits at 4%, its lowest since March 2023. Mortgage rates have responded, with the average five-year fixed rate dipping below 5% in August. Despite this, the residential market remains cautious. House prices fell by 0.1% in August and the RICS just reported falling house prices are more widespread across the country than at any time for a year.

Although this should mean affordability is improving, confidence is fragile amid tax reform speculation. Rachel Reeves’ upcoming Budget on 26 November could have a major impact - rumours of Stamp Duty Land Tax reform and a potential Capital Gains Tax on high-value homes are already unsettling buyers and sellers, according to estate agents. Until clarity emerges, they say transactions will take longer, and new rules announced in the Budget could see them take longer still.  

Despite these headwinds, optimistic housebuilders could look to real incomes stabilising as inflation at least moderates as a positive sign. Rental demand also remains strong, especially in many of the UK’s largest towns and cities.

Although inflation may be nearing its recent peak, its legacy looks set to linger in the property market. With interest rates, affordability, and fiscal policy all in flux, the final quarter of 2025 will be pivotal.