Outlook: UK economy

WHY IS it that soaraway house prices, credit growth and all other signs of a consumer spree take on such a totemic quality in any discussion about the UK economy? Even if we are not seeing a return to boom, late-1980s style, there is definitely a resurgence in some of its symptoms. London may be skewing the national figures, but a 2.5 per cent jump in a month as reported by the Nationwide is still a staggering rate of house price inflation.

The fact that the housing market has its hot spots and cold spots is irrelevant to the overall economic assessment. The reason house prices, like other asset prices, matter is that they are the earliest signal of incipient inflation. If house prices are rising across the country, it is an early warning signal of excess spending power. If house prices are rising in London it is just an even earlier signal. So while it is true that the housing market and consumer borrowing have not returned to the heady boom conditions of a decade ago, to find this comforting misses the point. They are not supposed to get back to that condition. The MPC will presumably act to raise interest rates first.

There has been a steady shift in the degree of concern shown about housing and other consumer indicators in the MPC's minutes and the Bank of England's Inflation Reports. The housing market got a dismissive sentence in June's minutes. By August, the committee had doubled its earlier forecast for house price inflation this year. The latest Inflation Report meanwhile noted that the household sector was once again withdrawing equity from housing, using loans secured on property to finance other spending.

Since then it has also emerged that some lenders are again offering mortgages worth more than 100 per cent of the value of the property on which they are secured.

The economy has changed for the better in the past decade. We are even getting used to low price inflation. But the laws of economics have not been repealed, and the early signs of boom are still relevant for interest rate policy.