As far as the Bank of England is concerned, the inflation panic is over for now. You may recall that many feared that one of Mark Carney’s first acts as governor of the Bank of England would be to put pen to paper and knock off a quick letter to George Osborne explaining why he was doing such a bad job at keeping inflation close to target. If inflation moves by more than one percentage point above the 2 per cent target, the UK’s most powerful central bank is required to write a letter of explanation to the chancellor.

As it turned out, inflation was 2.8 per cent in June – less than was feared and 0.2 percentage points down on the level that would have triggered a letter.
This week the data for August was out, and this time inflation was just 2.7 per cent.

Will it continue to fall? Answer: unless something odd happens, surely yes.
For one thing sterling is up, and recently rose to its highest level against the euro and dollar since January. For another thing, past movements in commodity prices suggest food inflation should fall sharply.

But thirdly, sheer maths seems to make it inevitable. Last autumn the UK saw prices rise quite sharply – up 1.5 per cent between August and December. Between May and August, prices rose by just 0.2 per cent. If the inflation rate we have seen over the last three months continues for the next three months, annual inflation will fall to just 1.3 per cent.

Now look at house prices and apply the same approach.

According to the ONS, house prices rose by 3.1 per cent in the year to July. But between August and December last year, houses prices fell slightly. If house prices rise at the same pace seen in the past five months over the next five months, then that will mean house price inflation will be running at 9.4 per cent by December.

Today’s ‘Daily Mail’ headlined: “Property price bubble is a MYTH”, and described the latest 3.3 per cent house price inflation rate as “modest”. But simple maths shows why this will change very soon and a bubble is, in fact, being created in our midst.

© Investment & Business News 2013