Thursday 11th April

The truth about inflation is that if it is between 5 and 10% it is actually a good thing.  We hear stories all the time about people who bought their houses in the seventies for a couple of thousand pounds and are now worth a hundred times that amount, or more correctly after buying and selling and taking out larger and larger mortgages on successive houses they now own a house in the hundreds of thousands.  How was this achieved?  Not by some brilliant financial management on their part but simply because of inflation.   When inflation is relatively high as long as your wages rise roughly in line with it you get better off.

Mortgages and other debts such as HP are usually a fairly fixed amount for a long period, so a monthly payment of a couple of hundred pounds that was say 50% of your net pay at the beginning of the loan after five years of ‘healthy’ inflation is suddenly only 30% or less of your expenses; gving you the opportunity to borrow more to either buy a larger property or to spend on material goods.

This was what happened through the seventies, eighties and nineties and to a lesser degree through the naughties too.  It fueled an ever increasing rising standard of living and had very little to do with economic policies being pursued at the time.  Despite the claims of Thatcher worshippers, GDP during the eighties was only 1.4%, compared to a post war average of 2.5% and was much higher during the so-called failure years of Wilson, Heath and Callaghan.

The misguided policy of the Bank of England (and central banks all over the world) of keeping interest rates so low has resulted in worthless savings and a stagnation that risks becoming permanent.  We actually need a bit of inflation in the system to promote growth and spending.

The only people benefiting from low interest rates are mortgage holders, but they would have benefited far more from a higher inflation and higher interest on their loans. I cannot see my kids, whose houses are all worth more or less just what they paid for them over five years ago ever seeing the huge financial rewards my generation saw from the simple result of inflation.