Inflation: Why we

19th October 2011

Economists had been expecting the consumer prices index (CPI) measure of inflation to rise to 4.9% in September from the 4.5% recorded in August, so the current rate caused widespread news on the subject and its impact.

However, there are clear winners and losers from the impact of this news – and the loser isn't the government. While it may add billions to the cost of, say, index-linked public sector pensions, high inflation reduces the value of the staggering national debt in real terms. In fact, one of the biggest beneficiaries of rising inflation is the government as it tries to solve the debt crisis.


The greatest squeeze is felt by pensioners. They live off their savings, needed to fund essentials such as food and fuel, which are the two areas that have seen some of the heftiest price increases. However, some pensioners are more susceptible to the sting of inflation than others.

People receiving public sector index-linked pensions are among the fortunate. This is even after their pensions' inflation-proofing was downgraded from the Retail Prices Index (RPI) to the Consumer Prices Index (CPI) last April, reports the Daily Telegraph. Accountants KPMG calculate that September's 5.2% annual rate of change in CPI will add £1.6bn to the cost of delivering public sector pensions next year, compared to this year's total of about £30 billion, says the report.

Savers – ‘slow motion bank robbery'

Inflation reduces the spending power of any cash squirreled away in savings accounts. Savers have already been hit by historically low interest rates, and coupled with the impact of inflation may wonder what the benefit is of slotting away spare cash when they can. Putting money in most high street bank accounts won't earn enough interest to replace the value lost by inflation each year, or ensure your savings grow in real terms. Equities may guarantee more protection against inflation, but then there is the risk of loss of capital.

Some good news for those in debt

Inflation effectively reduces the size of the debt in real terms, which is good news for the government and the general public saddled by debt. Anyone with mortgage debt, loans or/and credit cards will benefit from higher inflation. However, regular payments should be maintained, despite this good news, to avoid penalties or missed payments impacting your credit rating. The sensible option is to use this news to further reduce your debts.

Index-linked savers

Anyone who bought NS&I Index-Linked Certificates while they were still available made a wise decision, as their return on this investment will be rising alongside inflation. On the same tack, those who bought other inflation-proofed bonds or annuities will benefit. Whether this continues to be the case, time will tell, but so far, forecasts have certainly not been met.

What the experts say…

Shaun Richards, Mindful Money's economist blogger, believes the inflation figure to be ‘shocking'. He explains in greater length on his blog, but adds: "I have looked back at the Bank of England's past inflation forecasts for today to see how they compare with a level of CPI inflation of 5.2%.

November 2009 1.8%

February 2010 1%

May 2010 1.5%

August 2010 1.5%

February 2011 2%

Shaun adds: "These are estimates from the mid-range of its fan charts but as you can see any minor error in staring at the chart is dwarfed by the scale of the forecasting incompetence exhibited by the Bank of England. Apparently we are supposed to believe yet again that inflation will fall below target and only this month we required a further £75 billion of Quantitative Easing to stop a deflationary nightmare!"

Diogenesxz comments: "Over the last year, three things have became clear about the MPC:

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