Inflation – the savings killer

By on March 16, 2012
1 Trillion Zimbabwe Dollars

At a time of negative real interest rates, it is perhaps no wonder that we concentrate so much attention on the current predicament of savers. However, it is worth reminding ourselves that inflation – the kiss of death to savings – is constantly with us. Prices have tended to rise throughout history. A Parliamentary research paper on inflation found that, from 1750 to 2005, prices rose nearly 150-fold. As a result, one (decimal) penny in 1750 would have had the purchasing power of more than a pound in 2005.

The real acceleration in the decline in the purchasing power of the pound, however, came during the 20th century. If you feel ever poorer, the graph below amply demonstrates why.

This chart uses the RPI index based on January 1974 = 100 and uses a logarithmic scale, which gives equal proportional increases the same vertical value. For example, the doubling of prices between 1936 and 1949 (when RPI rose from 16 to 32) is given the same vertical impact as when they doubled in between between 1979 and 1989 (with RPI increasing from 224 to 455) or the doubling from 1989 to 2011 (RPI rising from 455 to 928).

Click on the graph for a better view

Inflation murders savings, chipping away relentlessly at their value. There is currently a commonly held belief in the financial community, particularly at the Bank of England, that a little inflation is no bad thing. Yet even an inflation rate of 3% reduces the purchasing power of £100 to just £73 after ten years, which is pretty much exactly what has happened over the past decade.

How the Bank of England “safeguards” our money

The same Parliamentary research paper pointed out that prices have risen every year since 1945. By 2005, prices were nearly 30 times higher. Shockingly, that figure has risen since to a multiple of 36; in other words you now need £36 to buy what would have cost just £1 in 1945. Go back to 1914 and the decline in the value of the pound is even more staggering, for in the ensuing years – less than a century – the pound has lost 99% of its purchasing power.

The graph below shows the declining value of the pound in your pocket. A pound you had as recently as 1974 is now worth just a paltry 11 pence.

 Click on the graph for a better view

“In less than 100 years, the pound has lost 99% of its value.”

It makes a mockery of the Bank of England’s declaration that its principle role is to “safeguard the value of the currency in terms of what it will purchase.” Use our own inflation calculator to see inflation’s effect on your savings. And if you think this might somehow exaggerate things, try the Bank of England’s own calculator, which all too appropriately shows a piggy bank being smashed. This shows that to purchase what £100 bought in 2001 would cost £135.70 just 10 years later. Go back 25 years and £240.42 is now needed to buy what cost £100 in 1986.

“£240.42 is needed now to buy what cost £100 in 1986.”

Why don’t we object more?

How do they get away with it? Why don’t we take to the streets to demand that the value of our money is preserved? Surely it can only be because people do not notice incremental increases in the cost of living. Inflation is insidious and its effects only become really obvious when it gets as bad as it was in the 1970s. This is a perfect example of the “boiling frog syndrome”. But inflation is constantly with us, eating away at the money we have struggled to put by, ramping up the prices of food at the checkout and, of course, rather conveniently reducing the real value of Government debt.

Prices have gone up every single year since 1945 and, given the recent oil price surge, the CPI 2% inflation target looks as far away as ever. Most MPs don’t seem to care, but then they of course still have their platinum-plated pensions and show no sign of relinquishing them. Heaven forbid they should suffer the same problems as the poor electorate. We must endure Sir Mervyn King and the unelected apparatchiks of the MPC telling us repeatedly that the danger is deflation, not inflation. Yet, if they really believe this, why is the Bank of England’s own pension fund so keen on index-linked gilts, which protect against the effects of inflation?

Insider dealing at the Bank of England?

Although Deputy Governor Charlie Bean has admitted that the Bank’s MPC entirely failed to predict the financial crisis, the Bank’s pension fund presciently sold its entire 21.6% holding of UK shares at the end of 2007, avoiding the calamitous losses suffered by everybody else’s pension funds the following year when the stock market collapsed.

Not only that, but the fund switched massively to index-linked gilts. The proportion held in index-linked securities was increased from 25.6% of the portfolio to a massive 70.7% in the year to February 2008. By February 2009, they accounted for 88.2% and, by February 2010, 94.7%. This level has been maintained, with index-linked consisting of 94.8% of the portfoio in the last accounts to February 2011.

Throughout this period we were being told by the bigwigs at the Bank of England that the danger was not inflation but deflation. As blogger Guido Fawkes points out, given the programme of Quantitative Easing instituted by the Bank, this virtually amounts to insider trading. I’m not holding my breath waiting for the Financial Services Authority to mount an investigation.

So, next time we hear Sir Mervyn King expressing sympathy for savers or telling us that inflation will soon be a thing of the past, bear in mind that his own pension pot, so well protected from the effects of inflation, was arbitrarily increased from £3.95m to £5.36m. And whenever Charlie Bean opens his mouth to insult savers, telling us to stop moaning and that we’re better off than we think, don’t forget that his own pension pot, a measly £1.44m in the year to February 2009, was increased to £1.97m the following year and then injected with yet another half a million pounds to bring it up to £2.52m by February 2011. And it is almost entirely invested in index-linked gilts.

In future, instead of listening to what the Governor tells us, perhaps we should instead study the behaviour of the Bank of England Pension Fund. Whatever Sir Mervyn King says, the managers of the Bank of England’s pension fund clearly do not believe inflation is being eradicated.

Even at current levels, inflation is hideously corrosive. Albert Einstein said that compound interest is the most powerful force in the universe. Given that inflation is its opposite, it is surely equally true to say that inflation is the most destructive force in the universe.


  1. frances

    March 16, 2012 at 5:10 pm

    I have long come to believe that MK and CB and the entire MPC are the biggest dirt bags of all time

    Add on MPs and Bankers and the entire lot of them are mirred in the dirt

    They are all doing very nicely thank you on MEGA salaries and INFLATION PROOF pensions while they impose on the rest of us CPI and devaluation of our savings

    If my MP tells me one more time that CPI is a more suitable index for Pensioners i will SCREAM

    As National Office of Statistics latest firgures show CPI includes lord knows how many Teenage Books and a host of goods and services the vast majiority of pensioners simply do not buy or cannot afford

    CPI and the entire Goverment /Bof E circus is FRAUD and yes you can bet the FSA wont be investigating this confidence trick anymore than they did anything about the failure of NR or B and B to comply with Banking Rules

    As far as i am concerned the entire bunch of them are “definitely not fit for purpose ” and therefore contrary to Sale Of Goods Act

    Corruption on the scale this lot are perpetrating is a National Scandal

    Recommend (26)

  2. Techno

    March 16, 2012 at 7:55 pm

    Very interesting, and I am quite sure that everything here is true.

    Perhaps the reason we do not notice inflation too much is that over the past 100 years our standard of living has so obviously improved. Perhaps this offsets worries about inflation. If technology weren’t making our lives more comfortable I think people would notice inflation far more than they do. It looks to me like we have may have reached the limit of personal comfort that technology can provide so maybe people will complain more in the coming years.

    By the way, there is no evidence that Einstein said that.

    Recommend (6)

  3. Anita Thompson

    March 17, 2012 at 6:18 pm

    The hard-earned money that savers have built up by doing without the things that spenders buy,is earning NO real interest.. Mervyn King and co make sure we are getting very nearly NOTHING for their privilege of allowing OUR money to be creamed off in order to benefit either the Bankers or the Government or both. Yes, they are making the most of OUR money.

    Mr. King,will also have you believe that inflation was predicted to fall and so less of a need to raise interest rates.The catch here is,they conveniently forgot to account for the fact that inflation ROSE, but didn`t raise interest rates ahead of this. No the reason is always about why we DON`T need to raise interest rates.

    Recommend (0)

  4. Nick

    March 18, 2012 at 2:04 pm

    Is it about time that savers got together and tried something like the BIG SWITCH?

    We can bargain together to get better rates from Banks or even move our money from £ to $ or E or anything else..

    Recommend (13)

  5. NR

    March 18, 2012 at 3:32 pm

    there is an easy solution if you are looking to save medium or long term … move your savings into precious metals and either take physical delivery or use a holding account such as UK minted coins such as Britannias and sovereigns are not eligible for capital gains tax and holding accounts can be used like savings account where you can instantly withdraw £ yet you still benefit from the steady appreciation of the value of the metal (or to be more accurate, you don’t lose out from the steady depreciation of the £)

    Recommend (3)

  6. Steve

    March 18, 2012 at 3:44 pm

    A very well put article which clearly outlines the case of what a criminal enterprise our current monetary and banking system really is.

    However, I would advise readers that unless they are prepared to start assassinating the crooks to make a point (as this is perhaps the only thing that will drive the Foxes from the Hen house), they should, instead of getting all hot and bothered about being trampled by the bankers, just buy some gold and silver, relax and let the crooks work for them.

    Despite being highly manipulated markets, gold/silver have returned an approximately 40% (before inflation) gain for this ‘risk taker’ in the last 3 years alone. I wonder what sort of return, other than a significantly negative one, the safety of sterling has generated for the deflationists?

    Recommend (6)

  7. Nick

    March 18, 2012 at 5:11 pm

    No point in complaining.If you don’t like it withdraw all your money ,part of your money or invest no further of your money with the banks. Everyone I know it doing one of the these 3 actions which will hurt the banks. Invest in precious metals as your steady reliable saver and shares with say oil exploratory companies for a riskier but more rewarding return. The days of 6.6% or 7% are unlikely to return for decades. The banks will at some time be forced to compete and therefore raise interest rates or lose even more customers. I felt physically sick that my savings are being used to bail out some stupid over-leveraged moron who thought the sun would shine forever so decided to take action 3 years ago and glad I did.

    Recommend (7)

  8. frances

    March 18, 2012 at 10:08 pm

    Ha Ha very funny and very good idea if of course you do not need to rely on the income from savings to fund retirrement

    Most savers are pensioners who because the state pension is so wholly inadequate have no option but to rely on savings interest .
    Their savings have come out of already taxed income and a lifetime of doing without

    David Cameron , Nick Clegg and George Osbourne all PROMISED to help savers

    Crocodile tears from MPC are simply a sop to what is daylight robbery and fraud but of course just like all the other financial scandals the FSA was supposed to protect us from it sits back and does nothing

    But Hey Ho all those officials are all earning mega salaries so why on earth would they care a fig about ripping off pensioners on low incomes

    They even have the unmitigated gall to claim CPI is more suited to pensioners because it more closely represents their spending

    Funny that only last week it was admiitted that teenage books and take away meals were high on the list of items used to measure CPI

    Council tax and housing costs are not included in CPI
    Pensioners do not need to live anywhere of course!!
    I challenge any MP to exist on State Pension because it most certainly will not to do more than cover the most basic costs of living in food, heat and light and they know it .

    But of course pensioners like savers are a blasted inconvienience who should be starved into their graves

    Recommend (8)

  9. CarlJ

    March 20, 2012 at 1:07 pm

    “From each (saver) according to his means, to each (debtor) according to his needs.” — Sir Mervyn King.

    Recommend (4)

  10. frances

    March 20, 2012 at 7:14 pm

    Is that really a direct quote from Mervyn King

    If it is please tell me where its from

    Recommend (0)

  11. CarlJ

    March 21, 2012 at 10:59 am

    Okay, maybe he didn’t say it in so many words – but you can be sure it’s his guiding philosophy.

    Recommend (3)

  12. frances

    March 21, 2012 at 1:57 pm

    After the Budget today you can be 100% sure that George Osbourne does giive a damm about the appalling plight of pensioners struggling to survive on savings interest

    He is a total and utter disgrace along with Danny Alexander and every member of the Treasury and their cohorts on the MPC
    The rich get richer and the elderly are penalised into the grave
    GO has done nothing whatsoever to boost growth or help the young find work

    in short he simply does not care for anyone other than himself

    Recommend (4)

  13. John.

    March 22, 2012 at 12:13 pm

    Frances they’re just a gang of crooks. Of course they get the privilege of wining and dining with those who get to say who is and isn’t a crook but that doesn’t alter the fact.

    On another note, the gold bug suggestions above are a joke right?

    How does holding precious metal pay for the essentials that savers earned interest is supposed to? Do we take the gold bar down to the local grocery store, flick out a knife and shave a sliver off for them to drop in the till?

    Precious metal is nothing more than speculation on price rise against fiat currency and inflation, in theory it’s a certainty but in practice it is an extremely long term prospect and as with the history of silver there are market forces and manipulations being played all the time which skew the real value. Anyone suggesting savers get precious metals as a solution is quite frankly an idiot.

    If you want to take a punt and think the massive bubble in the current gold price is set to continue then go for it by all means but just be aware you cannot do anything with it except look at it, cuddle it and polish it (gently). What gold won’t do is feed you, clothe you or put a roof over your head unless you can find someone else willing to pay at least what you did plus the dealing fees and the inflation on top.

    Just remember this, if you’d bought gold in 1980 then in 2012, your precious gold would still not be “worth” what you paid for it, over 30 years later!!! Not my idea of a sound financial play.

    It always amuses me, it’s hard to fault the logic in many ways that the precious metal bugs have but that if the scenario they’re hedging against actually happens then a lump of shiny metal hidden under the floor boards is going to be the very last thing you’ll want or need. A larder stocked full of bottled water, tinned fruit, veg, beans, clothing and fire wood would be a far more sensible and sound investment as a hedge against their precious doomsday scenario.

    For savers what is needed is some form of balanced portfolio that includes dividend paying stocks and shares which generally hold up well against inflation, but this isn’t the place to discuss it.

    Recommend (4)

  14. frances

    March 22, 2012 at 6:52 pm

    I had a pretty balanced portfolio of Stocks tuill all kinds of factors came in and wrecked them

    from NR to B&B to BP add on a few others that are in dire straits thanks to EU claptrap on environment issues and taxes and i cant wait to sell the bloomin lot

    As for GO continually claiming that the rise in state pension is massive and offsets the freezing of Age Allowance he is certifiable

    £5.30 on full state pension will not cover the inc in food heat and light in the past year never mind into next year and since i only get half state pension £2.60 is useless

    Recommend (2)

  15. John.

    March 22, 2012 at 9:00 pm

    Hmm, I don’t want to sound rude but the words basket and eggs come to mind.

    What I’m meaning when mentioning a balanced portfolio is a global basket of funds that don’t hinge on the performance of any one sector or region. Exciting it isn’t and certainly the get rich quick ethos of the financial marketeers has nothing to do with such an investment. What it does over the long term though is give a very reasonable prospect of retaining wealth by at least matching inflation. Short term fluctuations are all part of the equation.

    I don’t hold individual stocks as I’m not prepared to do the hours of study needed on each individual company to be certain they’re a good long term prospect, I might as well play at pin the tail on the donkey when it comes to stock picks for that reason. That’s even assuming I could get access to individual companies overseas, as well as having enough purchasing power to make the dealing costs and weightings on a whole range of them cheap enough to be efficient.

    It’s a whole can of worms but what I’m talking about is investing in global stock markets via funds and investment trusts and finding the cheapest and most efficient ways to do so. It isn’t for the faint hearted but also isn’t something anyone should be scared of, there is massive help available for such undertakings on sites like the money saving expert forum. The downside is the required reading and understanding but there is no such thing as a free lunch. It’s a sad indictment of the world we live in but metaphors and hyperbole aside, we’re swimming in a pool full of sharks and unless you grow a set of teeth yourself then you’re on the menu where the value of your hard earned wealth is concerned.

    Recommend (2)

Leave a Reply

Your email address will not be published. Required fields are marked *

To help us prevent spam, please complete the sum to post a comment *