Savers you've never had it so good?

Reaper

lol - brace yourself for the backlash of pensioners saying they "live off the interest" and now they are worse off. I've tried and failed to explain this before.

However with regards to pensioners they are less likely to have mortgages so they will be nearer the 3% CPI figure.

Reaper

tsmlion - that's not quite it. If inflation and interest rates were both 5% and you live off the interest then you are already reducing your capital by 5% every year without realising it.

If interest rates and inflation are both 0% then you can dig into 5% of your capital and be no worse off.

You are not being asked to take risks with your money.

mike22

I have £5000, shall I put in Fixed Bond with AER 3.75 % or not?

freddysmith

mike22 wrote: »

I have £5000, shall I put in Fixed Bond with AER 3.75 % or not?

If I didn't need the cash for anything else and any outstanding depts paid for then I would have no problem locking up the money for a year at that rate.

Milarky

purlease!. As themanbearpig says, inflation reported at 3% is just a distortion of the cuts to mortgage customers. For once, CPI is much nearer to true inflation (and still above the BOE's own target, notice) than RPI. RPI has been ripped to pieces as a representative measure of the 'cost of living'. That is the debate we should be having today.

As to 'educating people', just stick with 'money illusion' (the effect of ignoring the presence of 'inflation' when looking at nominal interest rates and asset prices for assets bought some time ago...) But, turning that around, and claiming that a statistical blip has made people better off?? Really!!!

gozomark

Its funny that when RPI was higher than CPI, these boards were full of people saying RPI was the better measure of inflation as it included housing. Now its lower, its CPI is better.......

As it happens, CPI is a better measure of underlying inflation - not just the housing aspect, but its also statistically a better indicator in terms of composition - RPI actually tends to overstate inflation over the long term due to its weaker basket rebalancing techniques. However, most people have mortgages, so RPI has its uses

completely agree with the money illusion point - I and many others have made it time and time again on the boards, but still people insist on the "I'm not spending my capital" line - fine, but then understand that its real not nominal capital that you should be protecting

derrick

In the third of Martin's scenario, should "Inflation" not read "deflation"?

MSE_Martin wrote: »

• 
  

• Possible future: Top Savings 1.5% Inflation (RPI) -2.0%. Save £1,000 for a year, and after basic rate tax you get 1.2% interest, ie £1,012. Yet a basket of goods that cost £1,000 would have DECREASED to £980 due to deflation. Thus saving’s increased your spending power by £32, meaning your REAL interest is 3.2%.

.

KingL

Interesting to note that if you use CPI data in Martin's scenarios, the real interest rates turn out as
Jul 08: +2.4%
Current: -0.2%
Poss future: -2.3% (assumes CPI at +1.1%)

If one accepts that the people who need most assurance are pensioners who personal inflation is nearer CPI, then that's still a cause for worry.

I tried to avoid debates on inflation rates

Unfortunately, that's just what you will get!!

If you are after a postive spin, then maybe there's a need for a calculator app, where people can key in their own circumstances (incl personal inflation) with the slant that 'even if your spending power is eroding, just look how slowly it is happening, and how long it would take before it became a problem..."

Milarky

As someone else (whom I cannot remember to thank here) helpfully linked to chrismartenson.com/crashcourse, I can only humbly ask anyone to look at the fuzzy numbers chapter

Inflation has been turned into a fuzzy number, not out of any single act of commission or omission, but because 'techniques' have constantly been dreamt up. The net result is that statisticians are colluding in a lie: inflation doesn't 'look' like the 1980s because we now 'measure' price rises in exotic and counter-intuitive ways.

'Fighting inflation' is a metaphor for what really goes on - selective reporting to 'anchor' perceptions.

Watch the video and then guess what the real rate of price rises should be...

Reaper

tsmlion wrote: »

I'm no rocket scientist.........but that is rubbish.

In the first example in the first year you are no worse off. In the 2nd year you will be 3.5% worse off then after that it would be a compound calculation.

In the second example you would lose £5000 each year.

Am I missing something?

Let's assume you start with £100,000 capital.

In the first example (5% inflation and interest) you will get a constant £5000 but it will buy less and less each month/year because of inflation. Furthermore the value of your remaining capital is dropping every year too.

In the second example (0% inflation and interest) you withdraw £5000 in year 1. That leaves you with £95,000 for year 2. If you take 5% of that it is £4750 and so on declining each year. It's just the same. Your capital is shrinking and the amount you are withdrawing is shrinking too.

The only difference is that the shrinking capital and withdrawals were hidden in the first example and obvious in the second.