Inflation robs savers, pushing gold and share prices higher
By Ian Cowie
Your Money Last updated: November 16th, 2010
By Ian Cowie
Your Money Last updated: November 16th, 2010
Another month, another missed inflation target for the Bank of England. Readers of a certain age who can remember double digit inflation in the 1970s may be tempted to think that today’s problem is pretty small beer. But the stealthy erosion of the real value of money – its purchasing power – is an insidious enemy of millions of savers.
Some of the most vulnerable are older people. It would take just 16 years – or less time than most people can expect to spend in retirement – for inflation to cut the real value of money in half if it continues to rise at 4.5 per cent; the annual rate of increase in the Retail Prices Index (RPI) during the year to October. Bear in mind that RPI was actually shrinking by 1.4 per cent last year and you can see how sound money is deteriorating.
You can see why the Government proposes to measure inflation by the Consumer Prices Index (CPI), which consistently produces lower figures – including its current annual rate of 3.2 per cent. CPI will produce much lower costs for the Government and employers when they calculate how much pensions should rise in future.
Unfortunately, as far as many pensioners’ daily experience of the rising cost of living is concerned, the CPI might as well be the Chinese Prices Index, as I have pointed out in this space before. It bears little or no resemblance to the bills they must pay because, among other factors, CPI does not include housing or heating costs.
Falling prices for electronic goods such as iPads and iPods may be good news for the young but largely irrelevant to older people who may spend more of their income on food and keeping warm. For example, gas and electricity absorb twice as much of many pensioners’ income than these fuel bills do for younger people, who earn more and spend less time at home, according to calculations by Alliance Trust.
However, for the first time in 30 years, from next April pay rises will be taken into account when the basic state pension is uprated in line with inflation. At present, indexation of pensions is calculated in line with the annual rate of increase in the retail prices index (RPI) in September or 2.5pc; whichever is greater.
In his Emergency Budget, the Chancellor introduced a ‘triple lock’ to index 11m people’s pensions plus State benefits and tax credits received by millions of others. These will rise in line with the bigger of earnings or price inflation or 2.5pc per annum.
Most people welcomed the change because earnings have tended to rise faster than prices in the past – although whether that remains true in ‘austerity Britain’ remains to be seen. Pay cuts are more likely for many than pay rises in the years ahead.
But a less obvious and potentially bigger problem to bear in mind is that next April will be the last time RPI is used to measure price inflation for the indexation of State and company pensions, benefits and tax credits. After that, the CPI will be used. It’s just a pity that in the real world most pensioners will have to buy food and fuel at British prices rather than the knock-down rates available in Kowloon or Shanghai.
Here and now, inflation is the spur that is turning many savers into investors. Supposedly risk-free bank and building society deposits are a waste of time and money when inflation is eroding its purchasing power at six or eight times the gross rate of interest being paid. By contrast, many shares and share-based funds look attractive – despite the absence of any capital guarantee – when the FTSE 100 index is yielding more than 3 per cent net of basic rate tax. No wonder share prices are rising, despite fears about the collapse of the euro and a double dip recession.
For those who require no immediate income but whose priority is the preservation of capital, whatever happens to paper money or fiat currencies, gold continues to shine. When RPI hit 5.3 per cent in May this year, Adrian Ash of the gold dealers Bullion Vault told me: “With the widest gap between RPI and Bank of England base rate since 1977 it is little wonder the gold price in Sterling jumped to a fresh all time high. When cash-in-the-bank pays less than zero, there is no such thing as a risk-free investment.”
Six months later, the slow-motion great bank robbery continues and gold has soared through $1,400 an ounce. Rising numbers of savers and investors are taking the plunge into precious metals and shares – despite fears that current prices look toppy – because, by contrast, inflaton means deposits are merely a slow and certain way to lose money.
No comments:
Post a Comment