MSE News: How to beat inflation - earn 7.9% on your savings

JamesU

ali137 wrote: »

Now you got me thinking again, was going to open the aa account but now cant decide.

My intension is to have the NSI account open for 1 year then close it. If inflation rate is currently 5.3% and next month say it falls to 5.00 and the rates very between the 12 month, how do NSI calaute the interst i should be getting at the end of my 1 year.

I presume if i depoist £12K in NS&I at 5.3% + 085% for month 1 the interst would be £59.83. Is that right???

Sorry for asking stupid question.:)

Not a stupid question

Easy calculation as in my post above: approx 1% + future inflation

Common mantra: do not invest in anything you do not understand

To understand properly, example here:


Acess RPI inflation index (RPI) and %RPI inflation (%RPI) in the link here:

http://www3.hants.gov.uk/finance/retailpricesindexandconsumerpriceindex.htm


Then for example:

Start date of 3yr certificates Feb 2008:

Feb 2008: RPI = 211.4, % RPI = 4.1% (NOT the starting interest +1%)
Feb 2009: RPI = 211.4, % RPI = 0.0% (hence no interest, deflation)
(where 211.4/211.4 = 1.0000 equiv to %RPI = 0%)
(OR, alternatively, (211.4-211.4)/211.4*100 = 0%)

% Year 1 return = 1% (assume change in RPI + 1%)

Feb 2009: RPI = 211.4, % RPI = 0%
Feb 2010: RPI = 219.2, % RPI = 3.7%
(where 219.2/211.4 = 1.0368 equiv to %RPI = 3.7%)
OR, alternatively, (219.2-211.4)/211.4*100 = 3.7%)

% Year 2 return = 4.7% (assume change in RPI + 1%)

Feb 2010: RPI = 219.2, % RPI = 3.7%
Feb 2011: RPI = XXX, %RPI = X%

% Year 3 return = X%

The interest you receive is the change in RPI + 1%, year on year as in the calculations above (really + 0.85%, 0.95%, 1.21% in years 1,2 and 3).

These figures are only for February, different figures for other months.

The % return in Year 3 will depend on the RPI value in Feb 2011.


AT PRESENT:

If you buy ILCs before end of May:

Mar 2010 (latest figures from ONS): start level RPI = 220.7 (%RPI = 4.4% irrelevant)

If you buy ILCs beginning of June:

Apr 2010 (latest figures from ONS): start level RPI = 222.8 (%RPI = 5.3% irrelevant)


This does not mean ILCs are yielding 5.3 + 0.85% = 6.15% in 1 year.


In the month the ILCs mature, the %RPI is the interest rate you receive, year on year. At present the %RPI is 5.3%. However, this 5.3% return highlighted by MSE refers to the return if you invested in the last 12 months and not what you will receive in the next 12 months.

The % return you will receive in the next 12 months depends on the difference between the start RPI when you buy and the end RPI value in 12 months time.

The % return you will receive in the next 12 months is not related to the current %RPI of 5.3%.

The monthly %RPI figures give no meaningful indication regarding the future interest rate that will be received on the ILCs.

This is why the MSE are causing confusion when suggesting a tax free yield of 5.3% + 1% bonus = 6.3%


JamesU

StevieJ

Useful website that someone posted.

http://www3.hants.gov.uk/finance/retailpricesindexandconsumerpriceindex.htm

JamesU

StevieJ wrote: »

Useful website that someone posted.

http://www3.hants.gov.uk/finance/retailpricesindexandconsumerpriceindex.htm

Good stuff, much more user-friendly format than the ONS data links. Have referenced it in the example for RPI and %RPI.

JamesU

Jonbvn

Sceptic001 wrote: »

No, interest on ILCs does not accrue monthly, it depends on the one-off annual change in inflation. So the rate you get will be the rate of inflation this time next year.

Forget about the rate of inflation! The return you get will be the % change in the RP Index between when you invest and when you sell. (with the usual caveats that min 1 year and no negative changes considerded).

Pendle_Gazza

Jonbvn wrote: »

Forget about the rate of inflation! The return you get will be the % change in the RP Index between when you invest and when you sell. (with the usual caveats that min 1 year and no negative changes considerded).

... which I imagine with rates as they are at present would suggest now is not the best time to be considering them really.

JamesU

Pendle_Gazza wrote: »

... which I imagine with rates as they are at present would suggest now is not the best time to be considering them really.

If you calculate the % increase in RPI from month to month (note: this is not RPI or %RPI) from the end of deflation in Dec 2009 to current date, you might think differently.

JamesU

Sceptic001

Jonbvn wrote: »

Forget about the rate of inflation! The return you get will be the % change in the RP Index between when you invest and when you sell. (with the usual caveats that min 1 year and no negative changes considerded).

Not sure I understand this, Jonbvn. How do you define "the rate of inflation"? My understanding is that the % change in the RPI over a given period (eg. 5.3% over the previous 12 months) is the rate of inflation (ie. they are the same thing).

Pendle_Gazza

JamesU wrote: »

If you calculate the % increase in RPI from month to month (note: this is not RPI or %RPI) from the end of deflation in Dec 2009 to current date, you might think differently.

JamesU

Yes, but December 2009 is irrelevant if investing now, isn't it? If how I read jonbvn's comments is correct, investing now would mean RPI would have to be above the latest 5.4% next May to receive any of the 'bonus percentage'? And with that figure being all but as high as it's been for some time, that would appear to be less likely to occur I would have thought?

pressuredrop_2

Inflation doesn't have to be above 5.4% to get the bonus. The RPI just has to be higher. RPI rises 1% = inflation 1% = 1% bonus.

JamesU

Pendle_Gazza wrote: »

Yes, but December 2009 is irrelevant if investing now, isn't it? If how I read jonbvn's comments is correct, investing now would mean RPI would have to be above the latest 5.4% next May to receive any of the 'bonus percentage'? And with that figure being all but as high as it's been for some time, that would appear to be less likely to occur I would have thought?

Example:
RPI March 2010 = 220.7
RPI April 2010 = 222.8
mth/mth increase in RPI = 0.95%

The month on month increases in the RPI are a useful gauge of the RPI inflation trend. The Dec 09 (RPI=218) and Jan 10 (RPI= 217.9) showed RPI inflation was stagnant at the beginning of the year (Dec-Jan = 0%), relevance of looking at Dec 09/Jan 10 RPIs as this was the point where there was a switch from RPI deflation to RPI inflation.

Between Dec 09 to present the RPI has shown month on month increases of 0% (Dec-Jan), 0.6% (Jan-Feb), 0.7% (Feb-Mar) and 0.95% (Mar-Apr). Anybodys guess if inflation will continue to increase or if there will be another period of deflation. I find analysis of this ongoing RPI trend useful for making an informed decision regarding what is happening with RPI inflation and any merit in purchasing ILCs.

JamesU