Deflation: the winners and losers

From Times OnlineMarch 24, 2009

Deflation: the winners and losers
Times Online

— The biggest losers are easily identified. About 180,000 people have annuities linked to the retail prices index, according to the Association of British Insurers, and many of the providers of these, including big names such as AXA, Prudential and Standard Life, will automatically cut the income received on them in the event of deflation. Other providers, such as Norwich Union and Legal & General, have stated that payments will not fall but merely remain unchanged until the retail prices index begins rising again

— Savers whose rates are linked to the RPI also lose out, such as those who have bought products from National Savings & Investments

— Among the winners are people who have bought gilts — government IOUs — as these pay a fixed rate of interest, which is worth more when prices are falling

— Although it may not feel like it, anyone with money in the bank will be a winner. If prices are going into reverse, any bank account paying interest, however modest, is worth having

— Similarly, most people on state pensions can be regarded as winners. State pensions increase at the start of the tax year in line with where the RPI stood the previous September. Because the RPI was 5 per cent last September, it means that the weekly pension rises on April 6 from £90.70 to £95.24. In practice, the relative spending power of the state pension will vary according to each pensioner's personal rate of inflation, which — depending on council tax bills, for example — may exceed 5 per cent. If deflation continues until this September, pensioners will still get an increase, as the Government has pledged that state pensions will never rise by less than 2.5 per cent a year

— Some businesses will also benefit, again depending on their individual levels of deflation. If the costs of a business fall, then even if it is not raising prices for its customers, its margins will be improving. In reality, deflation is likely to hurt many businesses, as their costs are rising because of the collapse of sterling

http://business.timesonline.co.uk/tol/business/economics/article5966409.ece


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