Save Our Savers asks the MPC to act to reduce inflation

On Wednesday and Thursday this week, nine grey-suited men will meet at the Bank of England and discuss inflation and interest rates. They are Sir Mervyn King; Charles Bean; Paul Tucker; Ben Broadbent; Spencer Dale; Paul Fisher; David Miles; Adam Posen and Martin Weale.

We can only speculate whether they have a preference for Hobnobs, Digestives or those weird pink wafers you get in biscuit assortment boxes. What we can be pretty certain of, however, is that all but Martin Weal and Spencer Dale will vote to keep bank rate at just 0.5%, as it has remained since March 2009.

The MPC is charged with keeping inflation at the Government’s target of 2%, yet CPI is 4.5% and appears to be heading higher. By our estimate, the real value of the country’s savings has lost over £50 billion in the past 12 months. With an effective transfer of wealth from savers to borrowers, the thrifty and the responsible are involuntarily subsidising the profligate and foolish. As David Cameron said, while in opposition, increasing debt and undermining savings is “both economically stupid and morally indefensible”.

We have written to the nine members of the MPC, highlighting the pain being endured by savers and those on fixed incomes. … Continue Reading

Quantitative easing won’t ease it for savers

Yesterday’s released minutes of the Bank of England’s Monetary Policy Committee show that another round of quantitative easing is being considered, with a call for another £50 billion of QE on top of the previous £200 billion. The bankers must be planning how to spend their record bonuses already.

The MPC’s doggedness is great for heavy borrowers and those with massive mortgages. It’s not such good news for savers and pensioners. But then we’re getting used to the MPC ignoring the pain of the nation’s savers, pretending that the current CPI rate of 4.5% – over double the Government’s 2% target – is a mere blip. Some blip.

I’m tempted to stand outside the Bank of England the next time the MPC meet holding a placard saying: “Unfair to Savers”. As savers outnumber borrowers at least six to one, it wouldn’t need many of us to make the point that savers are not only losing money fast – but are being taxed on those losses.

If you want to read up on quantitative easing, you might start with the Bank of England’s own Noddy guide.

It might not be good for your blood pressure, though. “Large cuts in Bank Rate and quantitative easing provide the economy with a substantial boost, and reduce the risks of inflation falling below the 2% target…But the Bank will not let inflation get out of control. Just as the Bank takes the steps necessary to contain the risks of below-target inflation, it also acts if it thinks inflation looks set to rise above 2%. In that case, the MPC could put downward pressure on spending and inflation by raising Bank Rate and removing the extra money by selling the assets it previously purchased.” … Continue Reading

Saver shock at retirement

Any insurance salesman will give you the ‘you can never have too much insurance’ patter. While this isn’t technically true, one de facto form of cover has long been wrongly ignored by many retirement savers because of potential cost and opaque information on whether to ‘buy’ it. We’re talking about defined contribution pension pots being ‘fire-proofed’ and the insurable event is inflation, specifically the RPI. Unfortunately, the majority of retirees don’t take out an index-linked pension because the financial hit is so great, yet its implications are far-reaching.

An RPI-proofed policy is the only investment guaranteed to beat inflation for pensioners, yet many prefer not to invest in them.

However, retirees who take out a ‘level’ fixed annuity (or annual income for life in exchange for a lump sum) can be pole-axed by the annual rises in the cost of living. With only a set sum of cash every month, the creeping price of fuel, food, bills et al can clobber the finances over the years. … Continue Reading

The incredible shrinking pound and your savings

It is now widely predicted that the Bank of England will raise the base rate sooner rather than later. Inflation is on the increase and the base rate can’t remain this low for ever, can it?

When Japan reduced its base rate to 0.5% in 1995 nobody expected it to remain at that level or under for the next 16 years, but there it is today at under 0.1%. I’m not saying that our economy is heading the way of Japan’s, just pointing out that the unexpected can and does happen. After all, how many people truly foresaw the banking crisis?

Inflation and the base rate have led us all on a merry dance over the years. In 1980 the base rate reached 17% and inflation peaked at 21%. During July and August 1982 the base rate was being adjusted twice a week in an attempt to meet the economic demands of the moment. In 1990 the base rate rose to 14.88% while inflation stayed below it at 10.9%. The current situation of a base rate being 4.6% below RPI is extreme, but by no means unprecedented. … Continue Reading

The destructive power of inflation

Einstein is reputed to have said that compound interest is the most powerful force in the universe. He could equally well have said that inflation is the most destructive.

Oil up 15%, bread 4.9%, coffee 9%, VAT 2.5% these are a few of the price rise that have recently made the headlines. The floods in Queensland have sparked warnings of disruption to sugar production and extreme weather in the Ukraine and Argentina is driving up the price of wheat.

This is inflation out in the open, it stares you in the face every time you fill up the car with petrol, it’s talked about in the news and it’s all over the papers. Generally speaking though we tend not to notice inflation; when you are working and earning a living you are to some extent carried along on an inflationary tide as over time your wages more or less rise along with it. … Continue Reading

Are savers being hung out to dry?

What was it that Donald Rumsfeld said? “We know, there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns the ones we don’t know we don’t know.”

In the recent press conference for the release of the Bank of England’s Quarterly Inflation report, Mervyn King showed a close empathy with Mr Rumsfeld. He very clearly explained what facts that he and the Monetary Policy Committee (MPC) did know and what they didn’t know, as well as what they couldn’t possibly know. The point of this was to stress the uncertainty of factors that the MPC must weigh up in coming to their decision. … Continue Reading

Inflation for the over 55′s

One of the main problems with measuring inflation is that everybody spends their money differently and so has their own personal level. So whilst the Office of National Statistics (ONS) may report is at 3%, this is simply an average for the whole population and may not be an accurate measure of the rate of inflation experienced by any  individual or  section of society.

In recognition of the fact that as people get older their spending habits change, Age UK Enterprises have commissioned the production of the Silver RPI.

Using the same data and similar methodology to that used by the ONS for its headline Retail Price Index (RPI) calculation, the Silver RPI is adjusted for the spending habits of different age groups. They give the example of electricity, where the over 75’s spend double the amount of those in the 55-59 age group.

Age UK Enterprises has published the data below to show how much greater inflation for the over 55’s was compared to the published RPI along with an estimate of the annual impact of inflation on each ages groups actual spending.

The table shows that since 2008 those in the 55-59 age group have experienced inflation of 1.8% greater than the ONS headline RPI rate and that the overall effect if inflation was to increase their cost of living by £500 a year. Whilst the over 75’s are even worse off, experiencing inflation 4.1% over the headline rate, however because their overall level of spending ends to be less this cost them £440 a year.

Their aim is to publish the Sliver RPI quarterly to coincide with the Bank of England’s Quarterly Inflation Report.

Read more about inflation in our How inflation affects your savings section.

How to have your inflationary cake and eat it

Inflation is proving to be the Chancellor’s best friend. In it he has an ally that is systematically reducing the real value of the UK’s debt and, at the same time, by changing the measure of inflation used to index link certain expenditure he is able to reduce Government spending. The fact that it is also eroding the value of the Nation’s savings seems to be of no concern to him at all, though.

Savers hold a total of £1.085 trillion in cash deposits that reduce in value by an enormous £10.85bn for every percentage point of inflation that they can’t make up for in interest which with today’s low returns, is most of them.

The Government, however, is more interested in its effect on the National debt, which is in the region of £900bn. Each percent of inflation reduces the value of the debt by a similarly massive £9bn a year.

Whilst on the one hand, however, Government favours high inflation, it is also in its interest for any index linked spending to be tied to low inflation. In accomplishing this neat trick, the Government is busy switching its use of the Retail Price Index (RPI) to the lower measure of Consumer Price Index (CPI) as the default for index linking payments. In so doing so it is able to save huge sums – a predicted £6 billion a year in benefit payments alone. … Continue Reading

Inflation up, savings down

Inflation’s many masks – from the Government’s preferred consumer price index (CPI) for managing the economy and monetary policy through to the ‘headline’ retail price index (RPI) used to adjust state pensions and benefits – make it impossible to know its true face.

The stark reality is that we all have our own personal inflation rates, and it’s this that really matters – not the national rates that are little more than an obtuse irrelevance to millions. Sadly the Government doesn’t bother to lift a finger to help address this fraught concern, preferring instead to focus on keeping its chosen CPI figure at 2% as alleged proof of economic competence… … Continue Reading