Deflation bad for savers?

nickmason

Only heard this on Victoria Derbyshire's PMQs programme on R5:
Rachel Reeves (a v intelligent university peer of mine, and a labour MP after the next election unless there's total melt-down) saying that "for savers, Gordon Brown is right, the worst thing for savers is deflation, because that will erode the value of their savings..."

Did GB say that? can this be true? I thought deflation protected savings! Or, as I suspect, is this an attempt to reassure the very people who are at risk from this QE policy that the government is looking out for them too, by baffling with deeply flawed economics?


Incidentally it appears that the latest coordinated line from the labour spin team (having ditched the "do nothing party" attack on the Conservatives) is that the Conservatives are "not Barack Obama".

Guy_Montag

Heard that too, but thought I had mis-heard, turns out she mis-spoke (I guess).

tomterm8

I guess she meant the income of savers was reduced, which is true, but of course the capital increases in value.

nickmason

So does anyone know what GB actually said? Does he think deflation is bad for savers? To be fair he could be right, in the sense of a destroyed economy. The trouble is inflation isn't great either. Decoupled price-inflation/saving-returns are the immediate problem for savers.

I wonder whether the pensioner/saver electoral cohort is starting to look very difficult for labour given the erosion of their income.

Old_Slaphead

I really don't understand this deflation stuff.

Older people spend most of their money on food, heating and Werthers Originals. The first 2 items are not reducing in price (ok, gas went up 50% last year and has now gone down a couple of percent - over 2 years it's still 40%+).

Where's all these deflationary price reductions that are benefiting older savers???

ad44downey

nickmason wrote: »

Only heard this on Victoria Derbyshire's PMQs programme on R5:
Rachel Reeves (a v intelligent university peer of mine, and a labour MP after the next election unless there's total melt-down) ".

I thought it was odds-on that there was going to be a total meltdown for Labour at the next election?

bendix

The value of CASH holdings would increase in real (not actual) terms, i suppose, but not in any other investment class such as property or shares. Bonds? i can't work it out. It's giving me a headache.

Graham_Devon

I heard someone (female) say around 1pm today on the radio that "Gordon Brown is right, the worst thing for savers is deflation and we are putting in place measures to stop that". If it helps, there was 2 people disagreeing with everything she said, then the travel came in and I had to go back to work.

I was going to write a post about it, but didnt, as I couldn't find a news article reference about it, so had no proof.

Couldn't quite get my head around it myself.

tomterm8

I think after some reflection I actually agree with her. It's a case of economic theory not really matching reality.

The problem is there is a large cohort of people retiring this year who will get annuities based on very low inflation. These annuities are fixed, and so when government policy - which is to create inflation - kicks in there savings will be whittled down quite substantially.

In addition, pensioners are a select group who spend money a greater proportion of their money on areas which are basically price inelastic, so the effect of any deflation will not significantly help them. At the sime time, their shares and other assets have been hammered very badly.

I suspect anyone retiring right now is going to have a much worse standard of living than they expected four years ago.

nickmason

ad44downey wrote: »

I thought it was odds-on that there was going to be a total meltdown for Labour at the next election?

She's taking over from John Battle in Leeds West - 55% of the vote, 13,000 majority in 2005. So it would really need a phenomenal meltdown - electoral calculus puts her in at 68 safest.

In trying to find that stat, have just found this!

Rachel Reeves

Rachel, 27, is an economist and was runner-up in Bromley at the 2005 general election. She was Bromley and Chislehurst’s Youth Officer during Labour’s first term of office (1997 – 2001) and is a graduate of Oxford University. She was educated at Cator Park school, Bromley.

The main themes of her campaign were:

• From Bromley and for Bromley.
• 5 year jail sentences for carrying illegal knives.
• Come on England.

bendix

I cant believe GB would have said that. It stands to reason. If I have £1000 in my savings today and I leave it there for a year (even at 0% interest) and we have deflation of -1%, then after that year I will only need to spend £990 pounds to get goods worth £1000 a year ago.

Thus the purchasing power of my cash savings is greater next year, than it is now, even if it hasnt increased in actual terms.