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  • FIRST POST
    • MSE Guy
    • By MSE Guy 14th Dec 10, 12:26 PM
    • 1,628Posts
    • 1,255Thanks
    MSE Guy
    MSE News: Inflation rise means all savings are 'losing' accounts
    • #1
    • 14th Dec 10, 12:26 PM
    MSE News: Inflation rise means all savings are 'losing' accounts 14th Dec 10 at 12:26 PM
    This is the discussion thread for the following MSE News Story:

    "No standard savings account can beat the current rate of inflation, meaning virtually every savings vehicle is a 'losing' account if the cost of living continues to rise at the same rate ..."

Page 1
  • rdtrdt
    • #2
    • 14th Dec 10, 1:11 PM
    • #2
    • 14th Dec 10, 1:11 PM
    The Bank of England's Monetary Policy Committee (MPC) has now been consistently wrong in its inflation forecasting for an extended period of time. There's two possibilities:-

    Either
    1. The MPC is deliberately ignoring its inflation targeting remit;
    Or
    2. The MPC is incompetent.

    It keeps referring to "temporary effects", but rather than being temporary these effects are persisting and worsening. Not long now until we see wage demands reflecting this persistent rise in inflation, and when these demands are granted, even higher inflation will become embedded.

    I wonder how long the MPC can keep this charade going?
    • SallySunshine
    • By SallySunshine 14th Dec 10, 1:12 PM
    • 679 Posts
    • 237 Thanks
    SallySunshine
    • #3
    • 14th Dec 10, 1:12 PM
    • #3
    • 14th Dec 10, 1:12 PM
    Hopefully the base rate will rise in the New Year but not enough to 'save' our savings

    however this has made my day

    http://www.telegraph.co.uk/finance/financetopics/financialcrisis/8200211/Ireland-blocks-Allied-Irish-Banks-from-paying-40m-bonuses.html

    Why can't this happen with some of our banks in the U.K.

    And if anyone states that old chestnut about we'll lose these wonderful people to other countries if we don't pay them their 'worth', they want to be thankful they are not being sacked or sued.
  • SG_Guy
    • #4
    • 14th Dec 10, 1:16 PM
    • #4
    • 14th Dec 10, 1:16 PM
    Personally, I am not too bothered by inflation outpacing savings accounts *provided* this is not over a sustained period of time (e.g. 2 years or more).

    The reality is, and prudence demands, we all need a cash cushion that is readily accessible, so putting cash into equity-income funds or other riskier investments is not a wise option. Money market funds might do slightly better than ordinary cash deposits but after fund expenses (albeit relatively low), am not quite sure it's worth sacrificing the capital guarantee and accessibility of savings accounts.
  • TMoose
    • #5
    • 14th Dec 10, 1:16 PM
    • #5
    • 14th Dec 10, 1:16 PM
    Why can't this happen with some of our banks in the U.K.

    And if anyone states that old chestnut about we'll lose these wonderful people to other countries if we don't pay them their 'worth', they want to be thankful they are not being sacked or sued.
    Originally posted by SallySunshine
    Technically it can happen to RBS and Lloyds Group, since they are majority owned by the govt who have the same rights as any majority shareholder to replace the board if they disagree with the direction the company is taking.

    For the remainder of UK Banks, or indeed UK Branches of Global banks, this would be extremely difficult to achieve as private companies have the option to do whatever they want with their money - subject to shareholder approval - and any attempts to legislate otherwise would probably be classed as restraint of trade, which has it's own economic implications.

    Still, we could just do away with it all and live in a communist society. That always ends well.

    Moose
    • Linton
    • By Linton 14th Dec 10, 1:33 PM
    • 10,633 Posts
    • 10,989 Thanks
    Linton
    • #6
    • 14th Dec 10, 1:33 PM
    • #6
    • 14th Dec 10, 1:33 PM
    The Bank of England's Monetary Policy Committee (MPC) has now been consistently wrong in its inflation forecasting for an extended period of time. There's two possibilities:-

    Either
    1. The MPC is deliberately ignoring its inflation targeting remit;
    Or
    2. The MPC is incompetent.

    It keeps referring to "temporary effects", but rather than being temporary these effects are persisting and worsening. Not long now until we see wage demands reflecting this persistent rise in inflation, and when these demands are granted, even higher inflation will become embedded.

    I wonder how long the MPC can keep this charade going?
    Originally posted by rdtrdt
    The MPC's control of interest rates can only handle internally generated inflation - rising wages causing rising prices causing rising wages etc.

    The bulk of the inflation that is happening now is due to the increase in VAT at the start of the year and external factors such as rising commodity prices. And we have a VAT increase at the start of next year. Nothing the MPC has control over can prevent these increases in costs affecting the standard of living of the Great British Public.

    Any pressure from rising wages in the short term is likely to be very constrained by the current unemployment level and the future shake-out in the public sector.

    There is some pressure to raise interest rates, but that is not to counteract the current inflation, but rather to prepare for the longer term future when the economy recovers and the current constraints on wages rising become less effective.
  • ed123
    • #7
    • 14th Dec 10, 1:48 PM
    • #7
    • 14th Dec 10, 1:48 PM
    .....surely gideon is not leaning on king to keep rate low because of our 4.8 trillion debt?.....I don't know and don't call me shirley...................<;-/
    • dunstonh
    • By dunstonh 14th Dec 10, 1:56 PM
    • 98,300 Posts
    • 66,548 Thanks
    dunstonh
    • #8
    • 14th Dec 10, 1:56 PM
    • #8
    • 14th Dec 10, 1:56 PM
    I saw figures published a few months back that showed the inflation figures without the VAT increase being under 2%. It cannot be underestimated the impact that the VAT increase had and how much the next one will have (as the last one drops off, the next one comes on).
    I am an Independent Financial Adviser (IFA). Comments are for discussion purposes only. They are not financial advice. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
    • JasX
    • By JasX 14th Dec 10, 2:04 PM
    • 3,898 Posts
    • 2,573 Thanks
    JasX
    • #9
    • 14th Dec 10, 2:04 PM
    • #9
    • 14th Dec 10, 2:04 PM
    Well my stocks and shares ISA has delivered a solid 20-30% each year since early 2008.... I'm doing ok
  • rdtrdt
    The bulk of the inflation that is happening now is due to the increase in VAT at the start of the year and external factors such as rising commodity prices. And we have a VAT increase at the start of next year. Nothing the MPC has control over can prevent these increases in costs affecting the standard of living of the Great British Public.
    Originally posted by Linton

    Which of course was fully known in advance, yet the MPC failed to incorporate this into its forecasts, which have been hopelessly adrift from reality.

    Its forecasting has consistently proven to be wrong. And wrong in the same direction, i.e. to underestimate inflation.

    To be wrong so consistently (partly for something such as the VAT increase, which was a known quantity) indicates either deliberate policy or incompetence.
  • rdtrdt
    I saw figures published a few months back that showed the inflation figures without the VAT increase being under 2%. It cannot be underestimated the impact that the VAT increase had and how much the next one will have (as the last one drops off, the next one comes on).
    Originally posted by dunstonh

    As this increase was a known increase, the MPC should have included this in its model and its forecasts taken the VAT rise into account. But they didn't.
    • Milarky
    • By Milarky 14th Dec 10, 2:26 PM
    • 6,290 Posts
    • 2,209 Thanks
    Milarky
    Before I read Guy's article I want to place on record my view that we should not blithely adopt CPI as the representative inflation index. Remember last year, when RPI was the unrepresentative figure - not the govt's preferred figure - but the media kept shooting out the fiction that we were 'in deflation' then?

    Right, I'm off to see if Guy talks about '4.7%' being the figure to beat or not.....

    I'm back.


    As the interest on most savings, other than cash Isas, is taxed, a basic rate payer needs to earn 5.88% before the deduction to beat the current RPI figure, while a higher rate taxpayer must earn 7.83%
    Well, that bit at least is the correct slant.

    But other thing these stories all slip up on is talking about current inflation and current savings rates in the same breath. As we know, inflation is a backward measure and interest rates are a snap in time - but only look forward. The 4.7% needs to be compared with (say) 1 year, 2 year (etc) bond rates from this time last year (and more complicated comparisons like 2 year, 3 year (etc) bonds from Dec 2008. That is: what inflation has done vs rates available at best lock-in rates becomes the measure of interest [no pun]/topic of discussion. We would then also need to average RPI over 2 years (which can still be done), 3 years etc

    Examples:

    Best rate from Dec 2009 was about 4% for 1 year - so -0.7% for ZR, -1.5% for BR and -2.3% for HR taxpayers
    Best rate (2yr) from Dec 2008 was about 6% [I'm guessing that one] RPI 3%/4.7%, so +3%/+1.3% for ZR, +1.8%/+0.1% for BR & +0.6%/-1.1%
    for HR taxpayers

    Yes, I'm sorry to say it but knowing whether you would have suffered loss of wealth due to inflation requires a patient, long term approach - not the stuff of catchy headlines.
    Last edited by Milarky; 14-12-2010 at 2:46 PM.
    .....under construction....
    • JamesU
    • By JamesU 14th Dec 10, 2:26 PM
    • 1,053 Posts
    • 834 Thanks
    JamesU
    I thought the 15% VAT was increased back to 17.5% at the beginning of Jan 2010. If so, unless I have the timing of %RPI calculations wrong, the start of the impact of the VAT back at 17.5% on inflation would not be seen until the Jan 2011 figures which are published in Feb 2011.

    Similarly, the effect of a VAT increase to 20% on RPI inflation will not be seen until Feb 2012 if the 20% VAT rate is introduced at the beginning Jan 2011.

    JamesU
    Last edited by JamesU; 14-12-2010 at 3:00 PM. Reason: reword
    • Linton
    • By Linton 14th Dec 10, 3:14 PM
    • 10,633 Posts
    • 10,989 Thanks
    Linton
    I thought the 15% VAT was increased back to 17.5% at the beginning of Jan 2010. If so, unless I have the timing of %RPI calculations wrong, the start of the impact of the VAT back at 17.5% on inflation would not be seen until the Jan 2011 figures which are published in Feb 2011.

    Similarly, the effect of a VAT increase to 20% on RPI inflation will not be seen until Feb 2012 if the 20% VAT rate is introduced at the beginning Jan 2011.

    JamesU
    Originally posted by JamesU

    err - the published inflation figures are the change in 12 months. Therefore the 17.5% change would be included from Feb 2010 (based on jans figures) and will last until Jan2011. Similarly, but a year later, for the 2011 change.
    • JamesU
    • By JamesU 14th Dec 10, 3:47 PM
    • 1,053 Posts
    • 834 Thanks
    JamesU
    err - the published inflation figures are the change in 12 months. Therefore the 17.5% change would be included from Feb 2010 (based on jans figures) and will last until Jan2011. Similarly, but a year later, for the 2011 change.
    Originally posted by Linton

    (i) This months %RPI = 4.7% refers to month of Nov 09 relative to month of Nov 10, and published one month later in Dec 10.
    (ii) VAT went back to 17.5% in Jan 10.
    (iii) Impact of increased VAT to 17.5% on RPI is in Jan 10 but that month has not yet been included in any monthly % RPI calculation.
    (iv) Earliest you can see the impact of VAT back at 17.5% is Jan 10 RPI relative to Jan 11 RPI to give % RPI for that period.
    (v) That % RPI comes out one month later in Feb 2011.

    JamesU
    Last edited by JamesU; 14-12-2010 at 4:09 PM.
  • opinions4u
    Hopefully the base rate will rise in the New Year but not enough to 'save' our savings
    Originally posted by SallySunshine
    Of course a change in base rate does not automatically mean a change in savings rates.

    I don't think the article states who was going to benefit from the bonuses that will no longer be paid in Ireland.

    If it's the blokes at the top who over exposed the organisation, that's all well and good. But the majority of bank branch staff in Ireland and the UK earn significantly LESS than the average wage.

    So while you worry about CHAPS fees and the rate of interest on your significant lump sum with Nat West, some hard working individuals were told that they would get a bonus of, perhaps, 5% of their realtively low wage if they achieved certain goals within their job. They've had that taken away from them.

    And if anyone states that old chestnut about we'll lose these wonderful people to other countries if we don't pay them their 'worth', they want to be thankful they are not being sacked or sued.
    And of course Mrs O'Reilley, the part-time cashier from the Cork branch, won't be able to take her kids to a caravan park for a week next year.

    There is a big difference between a multi-million pound award for a toff at the top, and the reality that for those at the bottom a bonus is basically something that makes a staff member's salary slightly more acceptable.
    Last edited by opinions4u; 14-12-2010 at 4:08 PM.
    • Linton
    • By Linton 14th Dec 10, 4:13 PM
    • 10,633 Posts
    • 10,989 Thanks
    Linton
    I could be wrong, getting confused myself now, but is this not correct:

    (i) This months %RPI = 4.7% refers to month of Nov 09 relative to month of Nov 10, and published one month later in Dec 10.
    (ii) VAT went back to 17.5% in Jan 10.
    (iii) Impact of increased VAT to 17.5% on RPI is in Jan 10 but that month has not yet been included in any monthly % RPI calculation.
    (iv) Earliest you can see the impact of VAT back at 17.5% is Jan 10 RPI relative to Jan 11 RPI to give % RPI for that period.
    (v) That % RPI comes out one month later in Feb 2011.

    JamesU
    Originally posted by JamesU
    Oh dear - try again. Lets assume that there is no inflation apart from a step rise in the cost of goods of 5% in the middle of Jan 2010 so goods which cost 1 on 1/1/10 and before cost 1.05 on 31/1/10 and after.

    Jan 2010's RPI change (1Jan09-31Dec09) -0%
    Feb 2010's RPI change (1Feb09-31Jan10) - 5%
    Mar 2010's RPI change (1Mar09-28Feb10) - 5%
    ......
    .....
    Dec 2010's RPI change (1Dec09-30Nov10) - 5%
    Jan 2011's RPI change (1Jan10-31Dec10) - 5%
    Feb 2011's RPI change (1Feb10-31Jan11) - 0%
    Mar 2011's RPI change (1Mar10-28Feb11) - 0%

    This is the problem with the headline RPI figure. it is fine for continuous changes but misleading for step changes. In the above example people would be complaining that the inflation rate hadnt gone down for a whole year whereas in fact there were no changes in prices during 11 months of that year (ie no inflation).
    Last edited by Linton; 14-12-2010 at 4:16 PM.
    • scarter
    • By scarter 14th Dec 10, 4:36 PM
    • 347 Posts
    • 392 Thanks
    scarter
    I have savings that I'm using to subsidise my income over the next 20 years or so until I retire. So low interest rates are obviously not good for me.

    Yet I'm not overly concerned by low interest rates *at this time*.

    The way I see it I have two choices:

    1. Sit tight and hope that interest rates go up soon (or inflation down).
    2. Invest my money elsewhere in the hope of getting a greater return.

    In recent years my savings have increased due to greater-than-inflation-rate-interest. I can afford the odd loosing year before my spending power is less than it was when I first put my money in the bank. If I take a long-term view I'm still 'winning'.

    I could take a gamble and switch to investments. After all, even if the worst happens I can afford to sit tight and give my investment a chance to recover. But in that worst-case-scenario my money is locked in for years (with no guarantee of even recovering it's initial value) and I won't be free to take advantage of any good opportunities that might come along in the future. I'd be kicking myself if great interest rates were just around the corner and I'd slashed my capital in half by gambling with investments.

    The country is in a bad state. Who knows what's ahead. At least with savings your capital is safe and you can pull your money out any time you choose. I'll be sticking with savings for the time being and keeping track of exactly how much I'm loosing.

    I'm not sure how bad things would need to get with savings before I'd be willing to risk my capital with investments. This would be the case at any time, but particularly in the current climate.
  • pqrdef
    In the above example people would be complaining that the inflation rate hadnt gone down for a whole year whereas in fact there were no changes in prices during 11 months of that year (ie no inflation).
    Originally posted by Linton
    And then there's a miracle in Feb 2011 when inflation suddenly comes down from 5% to 0.

    How convenient that the VAT increase next month, coming 12 months after a similar increase, will have negligible impact on the headline percentage.
  • pqrdef
    In recent years my savings have increased due to greater-than-inflation-rate-interest. I can afford the odd loosing year before my spending power is less than it was when I first put my money in the bank. If I take a long-term view I'm still 'winning'.
    Originally posted by scarter
    Fine, if you don't mind spending all your capital and you only want the interest to maintain the spending power.

    Conventionally though people have expected to maintain the real value of their capital and get an income from it on top of that.
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