Inflation question

lucky_in_love

According to the Bank of England website, inflation is currently at 3.3%.
If I'm earning 2.8% on my savings (non taxpayer) that's means I'm losing money, right?

jimjames

Yep. The 3.3% refers to CPI inflation. And the other rate of inflation (RPI) is actually 4.7% so you are losing out even more.

vart400

yep, that means your losing your purchasing power. You are doing better than me though, my Natwest cash ISA is only getting me 0.5%
Not much we can do about it because the government and banks don't care about people who save, they would much prefer people to stay in debt.
Look into investing if you want your savings to keep up with inflation, this is more risky than banking though. Or look for an account that pays higher interest?

Cautious_Investor_3

Hi

I could get even worse, studies have been done which show that the rate of inflation suffered actually increases as you get older and peaks between the ages of 65 and 70 at approximately double RPI, now that is really scary!

If inflation continues to rise during 2011, as I believe it will (just look at the factory gate inflation figures late last week) then the situation will get even worse.

It's not a popular view if you ask businesses and mortgage holders but a rise in interest rates, sooner rather than later, would certainly help out savers.

The Cautious Investor

hugheskevi

According to the Bank of England website, inflation is currently at 3.3%.
If I'm earning 2.8% on my savings (non taxpayer) that's means I'm losing money, right?

The inflation rate tells you how the price level changed over the last 12 months. So from that you can say that an interest rate of 2.8% over the last 12 months was a negative real rate of return.

To judge whether a current interest rate of 2.8% will give you a rate of return in excess of current and future inflation, you need to look at forecasts of inflation, such as those produced by the Office for Budgetary responsibility here.

The OBR's figures show inflation in 2011Q1 at 3.1% (they were produced back in November-ish), falling to 2.0% in 2012Q1.

vart400

I'm a tad confused about inflation.
When we have inflation, prices rise and we can't purchase as much with our money as we used to.
When we have deflation, prices go down and we can purchase MORE with our money. But the news and media keep banging on that this is a bad thing(resession).
It seems like a lose/lose situation to me.

opinions4u

vart400 wrote: »

I'm a tad confused about inflation.
When we have inflation, prices rise and we can't purchase as much with our money as we used to.
When we have deflation, prices go down and we can purchase MORE with our money. But the news and media keep banging on that this is a bad thing(resession).
It seems like a lose/lose situation to me.

Deflation is a fantastic concept.

If you know prices are going to fall, you won't buy goods until they do. I think that would just about finish off any chance of a spending lead recover from recession.

So yes, negative inflation is a bad thing.

Loughton_Monkey

lucky_in_love wrote: »

According to the Bank of England website, inflation is currently at 3.3%.
If I'm earning 2.8% on my savings (non taxpayer) that's means I'm losing money, right?

We have a rather perverse and extraordinary situation currently with interest rates under inflation, and yet 'healthily' above bank base rate.

However, you cannot trust inflation rates completely. They are simply an average, and because of that, they have to cover an extremely wide range of things - which means that nobody suffers that inflation exactly, except by pure chace. In the same way, very few people earn average salary. The vast majority either earn more or less than the average.

There are quite a few people for whom 'personal' inflation is huge. And equally, many for whom inflation is much lower than the advertised figure.

Motorists are feeling the pinch at the moment. House owners with large mortgages will suffer much less than RPI inflation if they have a larger than average mortgage, since costs have been steady for a long while now.

lucky_in_love

Thanks for all the replies, I thought it was a bit of a stupid question but it looks like I'm not the only one struggling to get my head around the fact that even though I'm saving I'm effectively losing money!

Milarky

hugheskevi wrote: »

To judge whether a current interest rate of 2.8% will give you a rate of return in excess of current and future inflation, you need to look at forecasts of inflation, such as those produced by the Office for Budgetary responsibility here.

The OBR's figures show inflation in 2011Q1 at 3.1% (they were produced back in November-ish), falling to 2.0% in 2012Q1.

..or wait 12 months...

opinions4u

lucky_in_love wrote: »

Thanks for all the replies, I thought it was a bit of a stupid question but it looks like I'm not the only one struggling to get my head around the fact that even though I'm saving I'm effectively losing money!

To be honest, if you look historically over a 30 year period you'll probably find that gross savings rates tend to beat inflation, but the deduction of tax for most savers means that their hard earned cash has never managed to keep up with it (excluding some specific short term periods that are opposite to where we are now).

Inflation is an evil that government should look to control ahead of all else within the economy.

I noticed our leaders held a "jobs summit" last week, asking employers how they could "create" new jobs. Allowing prices to rise forces firms to cut costs. Firms will not "create" new jobs in an inflationary environment. It is pointless to tell business to create jobs. Government has to create an environment where it is profitable for business to do so.