INFLATION - The Silent Thief
Former US President Ronald Reagan once said that inflation is “as violent as a mugger, as frightening as an armed robber and as deadly as a hitman”. Is this an overreaction? Or was he onto something more fundamental? You probably hear lots of talk of inflation, CPI and the price level on the news, but do you really understand the effect of it?
This week we take a more in depth look than usual at the dangers inflation can have on your finances. Current UK inflation stands at around 5.5% and some experts are predicting this headline rate could hit 7% at some point in 2022, especially when we receive the gas price increases scheduled for this April. This inflation rate is okay in normal circumstances, if we have interest rates, especial on saving, increasing nicely as well, which gives you more interest on your savings. However the huge problem at the moment is when you consider that the average interest rate you receive on a bank account will be around 0.1%, you are effectively losing money each year. Banks are forced to charge such low interest rates on accounts due to the Bank of England Base Rate being sat at 0.25%, the lowest rate it has ever been.to make a profit, banks and building societies cannot afford to pay out higher rates of interest to savers if the rates on loans are so low.the Base Rate transmits through the banking system due to the competitive nature of commercial banks, and it is savers who pay the price.
Inflation of 5.5% means that the ‘general price level’ in the UK rises by 5.5% each year.this level is worked out by taking a ‘basket of goods’, totalling up the average price of it all and comparing it to the price of the same basket from the previous year. So, when you come to do your weekly shop a year on, you’ll find that it will be slightly more expensive, and your hard-earned money will not go as far as it used to.
Now, inflation is not necessarily a negative thing. In some instances, it indicates that the economy is growing, and industry is booming, whilst sometimes it can indicate some shortfall in the supply-side of the economy. However, to you and your finances it is mostly negative and really should be something you keep an eye on. Inflation can become especially dangerous to savings if they remain untouched and not topped up, as in 10 years they could have lost up to 50% of their value or more.the biggest losers at the present moment are savers in the banks and building societies in cash deposit accounts.