Deflation bad for savers?

Martinslovechild

Reading in between the lines, I think that what she was discussing is the effect that deflation (or very low inflation) has on older savers, a lot of whom rely on the income (i.e. interest) generated from their savings, which in the past six months has reduced considerably. A saver 12 months ago could have expected to receive somewhere in the vicinity of £6,000 in income for every £100,000 of savings, but this has now reduced to nearer £1,000, meaning that if savers with to withdraw the same amount as the previous year, they must withdraw not only their interest but also some of their capital, effectively reducing their 'pot' to £95,000. It's very easy to see the effect that this can have over a prolonged period of low inflation and/or deflation.

Historically, it's very unusual to dip into deflation for a prolonged period (more than five quarters).

The real risk is hyper-inflation - whilst in retrospect, this can feel great with its ability to erode debt substantially after just a few years (but doesn't feel too great if you have a large mortgage during this period in which case the interest payments are considerable), it can force a wage/price spiral and generally ends with a bump.

It's also worth adding that CPI - the measure of inflation targetted by the Bank Of England Monetary Policy Committee - is an average of a basket of pre-determined products. It does not include mortgages (which explains why RPI - the 'older' measure of inflation - has been falling much faster), and the contents of the basket can (and does) change.

It's also important to acknowledge that inflation is personal. Older people's inflationary pressures are clearly very different from those of a young family. There is a personal inflation calculator on the government's website at http://www.statistics.gov.uk/pic/. It certainly makes interesting reading...

beingjdc

All the Rachel that's fit to print, here -http://www.labourlist.org/rachel_reeves

If I had to place a bet, I suspect she's using the word savers inaccurately - and maybe she means investors, homeowners and so on, rather than those with predominantly cash savings. Of course, deflation is bad for savers if the government response to it is interest rate cuts....

trenchwars

Sounds to me like some Orwellian doublespeak.

War is Peace
Freedom is Slavery
Ignorance is Strength
Deflation is Bad for Savers

Thrugelmir

bendix wrote: »

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.

The issue is that previously you would have used the interest on your savings to pay the bills. So at 4% after tax, £40 to spend.

Ok so prices are no lower. With no interest you spend £30 of your savings. That only leaves you £970 of capital. Even if interest rates rise your savings are gone for ever.

Ok if you have an income but not the same for others that depend on investment income.

Though protecting savers is a minor problem in the general scheme of things at the moment.

Generali

Thrugelmir wrote: »

The issue is that previously you would have used the interest on your savings to pay the bills. So at 4% after tax, £40 to spend.

Ok so prices are no lower. With no interest you spend £30 of your savings. That only leaves you £970 of capital. Even if interest rates rise your savings are gone for ever.

Ok if you have an income but not the same for others that depend on investment income.

Though protecting savers is a minor problem in the general scheme of things at the moment.

In a deflationary environment you could spend the amount by which the value of your cash is increasing with no impact on your spending power.

nickmason

Generali wrote: »

In a deflationary environment you could spend the amount by which the value of your cash is increasing with no impact on your spending power.

exactly - that's why this is a red herring, or a decoy. Deflation is good for savers. To state it's not is to promote the alternative, inflation, which is in fact bad for savers. It seems that the government is deliberately setting up a "we have brought you inflation as the lesser of two evils".

Redistributive, yes; morally hazardous, not to mention simply immoral, also yes.

MyLastFiver

According to a sterile model deflation is good for savers, but I suppose the measures the govt takes in order to combat inflation are bad for them, such as keeping interest rates low.

Deflation of, say, 2%, will probably keep BOEBR at zero, or as near as dammit. This is obviously bad for savers.

the_ash_and_the_oak

Basically we are told that high inflation is bad for savers as it reduces the value of their savings and low inflation is bad for savers as it reduces the income from their savings.

Poor old savers, in a no win situation!

bendix

Thrugelmir wrote: »

The issue is that previously you would have used the interest on your savings to pay the bills. So at 4% after tax, £40 to spend.

Ok so prices are no lower. With no interest you spend £30 of your savings. That only leaves you £970 of capital. Even if interest rates rise your savings are gone for ever.

Ok if you have an income but not the same for others that depend on investment income.

Though protecting savers is a minor problem in the general scheme of things at the moment.

In that case she is incredibly imprecise with her words. A saver in my world is someone who saves money. It doesnt necessarily follow that a saver is someone who has savings and is living on the interest - that's a different beast altogether.

In fact, you could logically argue that what she is talking about is most definitely NOT a saver, because it is someone who is likely not increasing their capital by increasing it monthly through savings.

bendix

MyLastFiver wrote: »

Deflation of, say, 2%, will probably keep BOEBR at zero, or as near as dammit. This is obviously bad for savers.

No it isnt. It's bad for those living on income generatedby savings, but it's not bad for those building savings. There's a difference.

Even with BOEBR at zero, those with cash reserves and those increasing their cash reserves will be ahead in real terms because their wealth is increasing in real terms through that 2% decline in prices, irregardless of whether they are receiving any nominal returns through interest payments.