It's hard to say this far in advance with the world economy and all, but I would think that tourism in Europe will be just as busy as most other summers. Especially after all the money woes this last summer that kept people from traveling as much as they would have otherwise. That sounds like a great travel plan. Have you been on extended backpacking trips before?
Hotels will definitely be more expensive if they're available at all in and around London during the Olympics. Most people book those rooms more than a year in advance. Prices are likely to be around the same as they are now by next summer depending on currency values. We just hit a nice high on the dollar vs euro, but there's no telling what the exchange rate will be by next summer.
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