Savers you've never had it so good?

GeorgeHowell

Not taking account of inflation in consideration of the value of savings & investments over time is one of many common irrationalities in the way many people view their personal finances. Other frequently encountered examples are :-

. Feeling better off and spending/borrowing more by virtue of upward valuation of property even when the benefit cannot be realised any time soon

. Buying to let

. Being primarily concerned about relative income (ie compared with other people), rather than absolute income

. 'Saving' money by buying goods and services at discounted prices even if they are not really wanted or needed

There is of course a debate to be had as to whether these human traits really are irrational. Assuming that everyone's motivation begins and ends with maximising income and minimising expenditure for a given level of utility then they are. But human psychology is more complex than that. A house being worth a lot more then when purchased provides a feel-good factor to some people than transcends the actual financial benefit. Buying property to rent out makes some people feel good simply that they can afford to do that -- owning two or more properties increases their self-esteem. Some people gain a disproportionate satisfaction from feeling better off than 'competitors' (work, colleagues family members, neighbours etc), since status is really more important to them than wealth. Some people get enormous satisfaction from feeling that they have obtained a bargain, more satisfaction that the item purchased itself may yield. It makes then feel they have acted smart and canny.

So yes, if someone has £100,000 in savings and they spend all the interest whillst inflation is at 5%, then in real terms they have run down their savings by £5000, without necessarily realising it. If inflation were zero they could actually draw out and spend £5000 of that money and the overall result would be the same. Nevertheless, the person concerned might gain a considerable sense of satisfaction from the posession of a six figure sum. If they happen to be retired and it represents perhaps mainly a golden handshake plus an inheritance, it may be more money than they have ever had, or ever dreamed of having some years ago. If it starts whittling down towards £90,000 this would be a worrying and disconcerting experience for some -- more so than the veiled and intangible erosion of purchasing power due to inflation.

Although I happen to believe that savers are actually better off in a climate of low interest rates and low inflation than the other way round, not everyone will see it that way. In terms of their own utility it may not be as irrational as it seems.

Primrose

All of this seems to prove that the majority of serious savers have more sense and prudence than the government that some of them elected. The harder the government try to get savers spending, the more desperate they sound, and the more stubbornly savers will dig their heels in. You can take a horse to water but you can't make it drink. We've all had our fingers burnt too badly by government actions in the past. Why should we meekly go out like a herd of lemmings now and throw ourselves over the cliff? What we're trying to do is ensure we'll all still be surviving after this government has long since gone. When every day we read in the newspapers of some new financial scandal or misuse of public money, can you blame savers for trying to protect their own interests? Certainly nobody else will.

Nomad25

CPI and RPI baskets - all the items you list are in the CPI and I presume in RPI as well

http://www.statistics.gov.uk/article...ticle_2008.pdf

1. Private health club / gym membership

2. Fixed line telephone charges – eg line/instrument rentals, call and operator charges, Mobile phone charges

3. Insurance
House Contents Insurance
Home contents insurance premiums
Health Insurance
Dental insurance Pet insurance
Subscriptions to private medical plans
Transport Insurance
Vehicle insurance

Foreign holidays insurance


4. Electricity - Average of the electricity companies’ tariffs

Thanks for this Gozo, but what I don't understand is how this equates to tiny % CPI/RPI, when things on this list have gone up by big %.

Simple dummies explanation please - one syllable words preferable.

Andy_L

Nomad25 wrote: »

Thanks for this Gozo, but what I don't understand is how this equates to tiny % CPI/RPI, when things on this list have gone up by big %.

Simple dummies explanation please - one syllable words preferable.

Whilst those things have gone up by a big %age they only account for a small %age of your total spend so their large increase is diluted by small increases/decreases on stuff that you spend more of your income on

MiserlyMartin

gozomark wrote: »

my partial error - its included in RPI, but not in CPI

It ought to be excluded from all inflation indexes. It is a cost of living paid out of net income.

All this debate centres around the fact that the inflation figures have been distorted by tracker/variable rate mortgages. Everything else is going up. Martins post is correct but it is flawed by the fact that virtually everybodys real personal inflation rate is nothing like the RPI figures on which his article is based. This is why for most people, the article is pretty pointless, sorry to say.

pilsdon

ah Primrose am new to this but glad to see someone who understands the Yossarian (Y) moments.When challenged by Major Major about his look after himself first attitude he said to Y what if everybody else took that attitude Y replied then I'd be a damn fool to do anything else.Rationality is relative.Beware those who spout wisdom and knowledge work on what makes simple commonsense never mind the statistics they are the average and no one wants to be that!

mean_momma

Primrose wrote: »

When every day we read in the newspapers of some new financial scandal or misuse of public money, can you blame savers for trying to protect their own interests? Certainly nobody else will.

What savers are trying to do is have some control of their financial circumstances. Whilst they have savings, they have the power to do what they like with their money, regardless of what might suit others.

northernstar5

Well - I've just worked my way right through the thread. Almost losing the will to live now!

I think a real difficulty in sorting out whether it's better to spend or save, is knowing one's own inflation rate. Tried to use the governent site to sort this out - but couldn't get it to work (and I've got a degree in economics - maybe that's why).

Also - still not clear from comments on here - if rpi is below 0% in September - what happens to state pensions in April 2009?

john_s_2

Blimey! This thread has moved on since I last read it.

Have we agreed on the inflation / savings thing yet? Or agreed to disagree?

Anyway, some people have expressed an interest in knowing a bit more about CPI / RPI, especially what made it the figure it was last month (ie the figure announced yesterday).

ONS always publish an article summarising the main contributing factors to the latest figure's movement on this link:

http://www.statistics.gov.uk/cci/nugget.asp?id=19

I don't know what happens to older articles - reading some of them would give a useful background to anyone interested. It concentrates on CPI (as that is the officially preferred measure) but discusses RPI at the end.

And there are various links from there should you want to know more. Obviously it gets pretty mathsy pretty quickly. But the above article is fairly readable I think.

I've pasted the relevant parts of the article, that show the main contributors into the difference between December's rate and January's below. It starts with what dragged the rate down, then discusses what dragged it back up again (it changed from 3.1% to 3.0%). The largest contributors to the change are cited. Anything else (regardless of how it might have affected you or me) did not have as much effect on the CPI. Remember, these are the differences bewteen December and January. So forget about anything that's gone up or down in February. That'll be announced next month!

The largest downward pressure on the CPI annual rate came from transport costs where the price of fuels and lubricants fell this year but rose last year.

A fall in car prices, lower costs for vehicle maintenance and repair and a decrease in air fares also contributed to the downward effect.

A further large downward contribution came from housing and household services.
Overall housing rents fell slightly this year, compared with a rise a year ago.
There was also a downward effect from fuel costs with electricity tariffs and the cost of heating oil falling this year but rising a year ago.

There was a large upward contribution from recreation and culture.
The price of toys and games increased following heavy discounting in December.
The effect also came from cultural services, newspapers, books and stationery, and holidays abroad.

There were further large upward contributions from:
Furniture, household equipment and maintenance where furniture prices fell by less than last year
Alcoholic drink where overall prices rose by more than last year
Miscellaneous goods and services where the effect mainly came from appliances and products for personal care
Clothing and footwear where prices in January fell by less than last year, following some heavy discounting in December

red_bertie

I sent a snotty feedback email about that gov website. Trouble is they are so far up the own b*ms, they don't aim it at real dummies [no offence] and KIS.