According to the latest Nationwide house price index, UK house prices fell 2.5 percent in May, which is the largest single monthly decline is the index’s history.

Due to the price drop, of the Bank of England’s monetary policy committee even more complex as it struggles to set an interest rate policy which is consistent both with surging inflation and a deep slowdown in economic activity.

The seventh consecutive price drop in the past 12 months makes this decline the longest single period of housing declines since 1992.

House prices, year on year, are now 4.4 percent their levels of May 2007. This is a the biggest fall since December 1992, when UK house prices were falling at a much steeper annual rate of 6.3 percent, in the midst of a severe housing downturn.

“The pace of house price falls accelerated in May as more weak economic news added to the gathering momentum of negative sentiment about the housing market,” said Fionnuala Earley, chief economist at Nationwide.

Ms Earley said that the average price for a house is £8,000 less than this time last year at around £173,583. However, house prices are still 5 percent higher than two years ago and 10 percent higher than three years ago.

Michael Saunders, an economist at Citi, noted that the drop in the price index was consistent with other data, such as that of surveyors’ and housebuilders’ groups which also show a sharp slowing in housing demand.

”Housing demand is likely to suffer a further blow in coming weeks as fixed rate mortgages rise in response to the recent surge in interest rates,” Mr Saunders said in a note.

With data showing inflation is rising faster than expected, traders have scaled back their expectations that the MPC will cut interest rates further.

Mr Saunders pointed out that a key interest rate used to set prices for two-year fixed rate mortgages had risen by nearly half a percentage point since mid-April, and large lenders are already announcing increased rates on their home mortgages.

He noted that historically, house prices and consumer spending have been highly correlated and show a closer link in the UK than in many other countries.

The drop in house prices was not entirely unexpected as Nationwide noted. The Bank of England, in March, reported an 11 percent drop in approvals for new home purchases to 64,000, which is the lowest level of demand since the records began in 1993.