Student loans negative interest, pay cuts, pensions & savings gains!

Former_MSE_Guy

Deflation Discussion...

The following is by Martin, from the weekly e-mail:

State pensions, student loans, pay and more all depend on the RPI rate of inflation. On Tue it fell to 0% meaning average prices haven't increased over the last year. The trends downward, so we're nearing the UK's first deflationary period for 50 years. Yet bizarrely the official CPI rate jumped from 3 to 3.2% as it excludes mortgage interest costs, which have plummeted due to base rate cuts. The effect?

• Student Loans may have NEGATIVE interest. The Student Loans Company's rate's changes in September based on March's RPI; if next month's figure's negative, those who started uni pre-1998 currently paying 3.8%, will see their loan SHRINK. The govt. hasn't confirmed if the same'll happen for post 1998 loans, as these are also linked to interest rates, and therefore have already dropped to 1.5% (full explanation: student loan repaying guide).
  
  
• The State Pension. In April it rises from £90.70 to £95.25 due to last year's high inflation. Future years depend on Sept's RPI rate; so if there's deflation, will pensions be cut? Thankfully no, the rules currently say the pension's guaranteed to rise at least 2.5%, even if RPI is lower. That could good news, growing pensions and falling prices (see the State Pension Boosting guide for more).
  
  
• Pay cuts? Many people whose pay is dictated by wage settlements (e.g. union negotiation) have deals with raises linked to RPI; so 0% or negative, could means pay freezes or cuts.
  
  
• Prices falling... good or bad. On one hand cheer for cheaper prices, gas & elec, petrol and rents have already dropped and if we move into real deflation, more's to come. Yet if people delay spending, knowing things will get cheaper, there's less cash in the ecomony, leading to further recession, less demand, and a deflationary spiral.
  
  
• Good news for savers? If in a few months we're in full-on deflation, it'll offset the impact of low interest rates. Lets say £10,000 currently buys 100 shopping trollies of goods. If its saved earning 1% after tax interest when inflation's -2% (ie deflation) a year later there'd be £10,100 in the bank, but the shopping would now cost just £9,800. So you're 3% better off and can withdraw £300 of savings without impacting their purchasing power (more info: Top Savings).

Of course inflation and deflation hit people in different ways (see the govt inflation calculator for your personal inflation) yet it's worth understanding the thinking.

Please click reply to discuss

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Antispam

I dont see prices falling. Food still expensive compared with this time last year, hardly any BOGOF now use to save about £30 its lucky its £4 now. Energy prices still all time high no cuts there as yet. Only thing I seen come down in my mortgage because my fixed rate dropped in Feb 09 now not every one has not seen there mortgage dropped, although the biggest winners are on trackers

I use to may around £70 a week on food now its around £85 and of course the rip off fuel prices

MRSTITTLEMOUSE

I'd love to know how this has been worked out.Apart from mortgages nothing seems to have gone down at all.
Fuel is still the same and food seems to be going up and up,certainly not down.

lostinrates

It would have been interesting to attach to this thread a personal inflation calculator like and a poll to see who feels, having run the calculator, they are experiencing inflation, deflation or no change.

maveli

Same news on sky with an empasis on inflation. RPI, CPI and so on... don't knwo what to believe.

<<http://news.sky.com/skynews/Home/Business/Shock-Rise-In-Rate-Of-Inflation/Article/200903415247723?lpos=Business_Carousel_Region_2&lid=ARTICLE_15247723_Shock_Rise_In_Rate_Of_Inflation>>

And BBC think it is deflation Sky think it is inflation
<< http://news.bbc.co.uk/2/hi/business/7959564.stm>>

Generali

maveli wrote: »

Same news on sky with an empasis on inflation. RPI, CPI and so on... don't knwo what to believe.

<<http://news.sky.com/skynews/Home/Business/Shock-Rise-In-Rate-Of-Inflation/Article/200903415247723?lpos=Business_Carousel_Region_2&lid=ARTICLE_15247723_Shock_Rise_In_Rate_Of_Inflation>>

CPI and RPI measure slightly different things. RPI includes mortgage costs and CPI doesn't.

I think RPI is a better measure although it has weaknesses.

ad9898_3

MSE_Guy wrote: »

This thread has been set up to discuss the following news story:

Inflation hits zero

Only for mortgage holders on SVR's/trackers, and heavy fuel users.....oh and in the eyes of the government:rolleyes:. For everyone else..... in the words of Yazz:D, 'The only way is up......baby !'

Antispam

I dare say many employees have seen cuts in there wages too, although some may say they are still fortunate compared with thoes out of work

ad9898_3

Generali wrote: »

CPI and RPI measure slightly different things. RPI includes mortgage costs and CPI doesn't.

I think RPI is a better measure although it has weaknesses.

The issue is it should have been used when house prices were getting out of control, thus dampening the market with higher IR's. Cynically now, it's only being used to bail out the over indebted/re-inflate the housing bubble.:rolleyes:

maveli

The Bank of England uses the CPI, the index of consumer prices, to set interest rates

That worries be as I am on a tracker

StevieJ

Generali wrote: »

CPI and RPI measure slightly different things. RPI includes mortgage costs and CPI doesn't.

I think RPI is a better measure although it has weaknesses.

RPI is not a good measure for uplifting pensions as most pensioners do not have a mortgage :cool: