In recent months a lot has been made about the high rate of inflation in the UK, with most experts agreeing that this is a bad thing for the UK economy as a whole. Why is it a bad thing? And who is most likely to suffer because of it?
The first thing to bear in mind is that inflation isn’t necessarily an evil. In certain situations countries can get out of their debts as a result of prolonged high inflation. However, in the broad variety of cases, high inflation is troublesome and, over a long period, can be seriously debilitating.
The reason for this is that if, for example, you have a basic bank account from Santander or any other bank for that matter, your interest rate may be around 1%, or possibly a little more or less. In times of low inflation, this is ok, you’re not using the account to save, just for your daily living costs, so the fact that the interest rate matches inflation isn’t a problem.
When inflation is high, as it has been recently, the money that is sitting in your account is actually becoming less valuable in relation to the average cost of things, the bigger the difference between the rate of inflation and the rate your bank offers, the quicker this devaluing happens.
In a perfect world, wage rises would match inflation, however, they don’t, so over a long period, high inflation can mean that people’s standard of living drops (because the price of everything rises, but their wages stay the same).
Thankfully, for most people, after a prolonged period of elevated inflation, price cuts are on the way. Some experts are even predicting that inflation will be below 1% in December, or even that we’ll drop into deflation. Evidently the Bank of England monetary policy committee isn’t too concerned about long-term inflation because of consistent rounds of quantitative easing (essentially printing money) which usually comes with inflationary pressures.
All of which means that as the inflationary rate does drop, household budgets will suddenly find themselves with a little more spare change, and saving will suddenly become a lot more attractive because, even though interest rates will remain low for a while, they will probably be higher than the inflation rate, good news for savers.
After a tricky few years for savers, a drop in inflation looks set to arrive at a nice time. Maybe, just maybe, this financial crisis might be easing up.