Inflation

noclaf

I am around 16/17 years away from retirement, possibly longer. As much as I'm not too concerned about my main work pension (DC) due to drip-purchasing units each month, my non-pension investments are taking a battering. I've tried to tweak a few of my funds earlier this year to avoid being too heavily skewed to Growth funds but that aside, think I just need to close the curtains and try to avoid looking outside! Overall I'm still heavily in cash, not by intention...it's both good (not subject to current market conditions) and bad (inflation). The house needs quite a lot of modernising so think this might be a good time to do it( whilst maintaining a decent cash buffer)

Sea_Shell

Can anyone help me understand (general) inflation...

I understand that if something was £1 last year, and inflation is at 10%, that same item now costs £1.10.

However, we never seem to get (general) deflation, to take prices back down to where they were*.  We might just get a lower rate of inflation.

So even if next year inflation is back to 2%, is that still £1.10 plus 2%?

Inflation compounds?   Unless it turns negative?

So even if inflation was brought under control, we're still going to be paying these high prices, unless we get a period of rapid deflation, which seems to be thought of as a bad thing too.

If the world could, at the flick of a switch, go back to 2019, before all the 💩 hit the fan...what level of general deflation would now be needed, to undo all what's happened since?



*I realise that individual items can go back down sharply due to market forces, like petrol during lockdown.  

Albermarle

So even if next year inflation is back to 2%, is that still £1.10 plus 2%?

That is correct.

So even if inflation was brought under control, we're still going to be paying these high prices, 

That is also correct. Two out of two so far 

 unless we get a period of rapid deflation, which seems to be thought of as a bad thing too.

Yes deflation is seen as a bad thing, as it can suppress demand amongst other things. For example many would put off buying a new car if they thought it would be cheaper in 12 months time. So with poor demand prices could keep falling in a deflationary spiral, causing poor demand and therefore big job losses.

Probably if oil/energy prices dropped and this caused a brief period of deflation, then maybe would not be such a bad thing as long as it did not spread to the rest of the economy too much. I think the best hope is that inflation subsides to the target 2% and you just have to see 2022 as a kind of one off year that has made everybody a little poorer. Only my theory of course.

JoeCrystal

See Japan on a lesson of what happened if there is a prolonged deflation. Consumers will wait later on saving money so they can buy them cheaper later on.

bostonerimus

I'm not worried about inflation for myself as I have plenty of head room in my spending plan and a government DB index linked plan that has a COLA. Although it won't match inflation, but any increase is better than none or having to do drawdown at a time of both falling investment values and rising inflation. I will have state pensions in a few years too so that will give me more index linked income.

I really do worry for those close to retirement age see the value of their DC pots falling and have to make larger withdrawals to keep up with inflation; that's a double whammy. They could well panic and sell at a very bad time and lock in losses for the rest of their retirement.

2nd_time_buyer

bostonerimus said:

I really do worry for those close to retirement age see the value of their DC pots falling and have to make larger withdrawals to keep up with inflation; that's a double whammy. They could well panic and sell at a very bad time and lock in losses for the rest of their retirement.

Or sell at a very a very good time if the stock market drops further. I have no idea where the market will be in 12 months. My best guess is that it will be within +/-25% of where it is now.

bostonerimus

2nd_time_buyer said:

bostonerimus said:

I really do worry for those close to retirement age see the value of their DC pots falling and have to make larger withdrawals to keep up with inflation; that's a double whammy. They could well panic and sell at a very bad time and lock in losses for the rest of their retirement.

Or sell at a very a very good time if the stock market drops further. I have no idea where the market will be in 12 months. My best guess is that it will be within +/-25% of where it is now.

It might well be a choice between bad and really bad. If withdrawals were calculated using pension pot values 20% higher than they are now and they sell into a falling market then that loss will propagate through their retirement and either reduce the amount they can sensibly withdraw or increase the probability of running out of money. This is the time that you fall back on reducing spending and using your cash buffer. If you can cut your spending by 10% then you will compensate for overall inflation and if you can spend cash savings you won't have to lock in losses and you can wait for the recovery. If that recovery doesn't emerge this time we are all in for difficult times.

QrizB

Sea_Shell said:

If the world could, at the flick of a switch, go back to 2019, before all the 💩 hit the fan...what level of general deflation would now be needed, to undo all what's happened since?

This is pretty simple to work out, at least in the abstract.

The CPI (or the RPI, or CPIH, or whatever) is an index. In 2015 it was 100 and there is a published value for each month thereafter; values for the past 13 months are here but values for previous years are also available from other parts of the ONS website. I'm going to use the values on that page for convenience.

• In June 2021 the CPI index was 111.3. This is an increase of 11.3 since 2015, ie. (11.3/100) 11.3%.
• In June 2022 the index was 121.8, an increase of 10.5 since June 2021 or (10.5/111.3) 9.4%.

In June 2019, the CPI index value was 107.9. The value today is 121.8, an increase of 13.9 or (13.9/107.9) 12.9%. For prices to return to that level, they would need to fall by (13.9/121.8) 11.4%.

michaels

IF fuel prices stand still then after 12 months their direct impact on inflation will drop out (although second and third hand effects from things like shipping costs and wage rises will carry on.

If they were to suddenly drop back to the levels of 18 months ago (regime change in Russia?) then I think we could actually see negative inflation just because they are such a big part of the overall basket.

Sea_Shell

Thanks guys.  @QrizB - I should have got that, as DH has used the index figures to apply to his DB pensions (before inflation breached the cap!), and we used to have an inflation linked savings account!!   I'd forgotten it actually being an index.

Lets hope that the prices have "topped out" so to speak, as it sounds pretty much like they are baked in now.  Lets hope we don't have 10% on top of 10% next year....which seems entirely possible the way prices seem to be going. 

Maybe individual things (like fuel) will drop off by a large chunk, but that's only possible if world situations change.

So, if, by some miracle, next year inflation is "only" 3%, the PTB be patting themselves on the back, of how well they've done, but that figure is "built on giants", and higher prices are here to stay....just not as high as they might otherwise have been.

It's not a pretty picture is it.