13th March 2013
The media is paying a great deal of attention to the fact the basket of goods used by the Office for National Statistics to create the inflation indices is changing.
It appears that not many people are buying champagne in bars but young adults are buying white rum used to make mojitos and daiquiris. Greater weight is being given to books downloaded on to Kindles which is no surprise. Daily disposable contact lenses have replaced monthly soft lenses and blueberries are in and cold pub sandwiches are out, which may not sound very surprising from the unappetising description either.
But while tastes change no-one is expecting what you might call stubbornly medium inflation to alter significantly.
First the big picture is that low base rates quite high inflation, means that we are witnessing negative real interest rates, even if the Bank of England probably won’t start charging retail banks to hold money there with actual negative rates. For those reliant on savings it has become increasingly difficult to guard against inflation’s erosive effects.
Household incomes are shrinking dramatically. A recent survey by U-switch shows that a basket of household items has increased in price by 25 percent in the last five years as the Telegraph reported this week. The cost of living has increased four times faster than earnings so real purchasing power is at 2003 levels.
Three quarters of those questioned by comparison website said they feel poorer since the Coalition Government came to power. Some 85 per cent of respondents claim Chancellor George Osborne does not understand the real fears of ordinary people and 55 per cent expect the Budget to make things worse. Not great for an embattled Chancellor.
Savers have been presented with an increasingly difficult task if they wish to outpace inflation unless they are prepared to take more risks by moving into stocks and shares or perhaps single company bonds.
For investors, the big issue with stubborn inflation suggests you will need to gather a larger pot of money to achieve a certain level of income in retirement and it is obviously more difficult to achieve other goals if they cost more in real terms. This is explained here in a Mindful Money Podcast with IFA Peter Chadborn.
Whether you are simply getting by, saving or investing, if inflation continues at what you might call a stubbornly medium rate, it is something you increasingly need to think about regardless of your weekly blueberry or indeed mojito intake.