Yes it is!

Inflation, which is a rise in the general level of prices of goods and services, is running away with us in the UK and there are now urgent calls for something to be done to control this dangerous animal. 

The Consumer Price Index (CPI), which measures changes in prices of consumer goods, and is used by the government to measure inflation, currently stands at 4.5%, more than double the Bank of England’s target.  The main reasons for this are down to the rises in VAT, energy prices and commodity prices, particularly food.

Although inflation is good for economies, as it creates growth, too much inflation is damaging as it makes things unaffordable and encourages people to borrow.  Therefore, in order to curb inflation, and make goods and services more affordable, interest rates must rise.

Higher interest rates reduce inflation and thus reduce consumer spending since they increase the cost of borrowing and entice people to save.  Therefore people have less money to spend and so prices must fall to attract buyers back to the table.

This is where the problem starts for commercial property owners.  Higher interest rates increase the cost of borrowing and so property owners, who cannot afford increased loan payments, are forced to sell.  All of a sudden, the market starts to see an increase in the number of properties coming to the market which ultimately forces prices to fall.  Furthermore, those looking to buy, who will face increased borrowing costs, will not be keen to pay high prices for properties which again will cause prices to decline.

Many predict interest rates will start to rise in July/August 2011 by 0.25-0.5% and this could be the first of several increases which will add further pressure to an already faultering commercial property market.

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