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BookmarkThe latest inflation figure of 2.9pc might not seem alarming, but these small increases are continually eroding the value of people’s savings and reducing their standard of living.
You may not think prices have gone up much in 2013, but I can assure you they have. You need to focus not on the annual increase, but look instead at the cumulative impact of inflation over a longer period.
Since 2000, prices have risen by over a half according to the Retail Price Index (RPI). Second class stamps, for example, have gone up by over two and a half times – from 19p in 2002 to 50p in 2012.
With inflation recorded at 2.9pc in June, rising from 2.7pc in May, it seems likely that rates will continue to rise in the future.
Bank of England Governor, Mark Carney, has discussed encouraging higher levels of inflation to stimulate growth. This could mean switching from an inflation target of 2pc to 4-5pc. In this scenario, house prices could double in the next 15 years.
On top of this, the Government’s ongoing financial repression policy – keeping interest rates low in order to keep their own debt repayments as small as possible – means savers could lose a substantial amount of money.
If interest rates remained at 1.5pc (1.2pc after basic rate tax) and inflation averaged at 5pc for the next decade, the value of a person’s savings would lose over 30pc of its value.
With inflation rising and wages remaining low, the standard of living in the UK is also likely to take a hit.
From 2008 to 2011 the average UK household income has failed to increase, a likely result of higher unemployment and a rise in the below-inflation cost of living.
The average gross weekly income remained stagnant at £713 from 2008 to 2011, according to the ONS Family Spending Survey figures.
Over this four year period, the average UK household suffered a 12.5pc RPI increase in prices, without any extra income.
Given this, it is not surprising that consumption in many categories has declined. Families have been forced to cut out luxuries like holidays and recreational goods in order to be able to afford essentials like utility bills and council tax.
Because of inflation, the average household had to spend an extra £200 plus a year on car fuel, food and utilities. Other costs like car insurance also rose, with inflation reaching 80pc in that area over a three-year period.
There has been some respite for people however, as the average amount of tax paid from 2008 to 2011 decreased due to some tax bands being pushed up, thereby allowing people to pay a lower amount of tax on a larger proportion of income.
Those with variable rate mortgages also benefited slightly as interest payments declined.
Of concern, though, is what happens going forward and what effect inflation is going to have on family expenditure over the next few years.
There is no sign of wages rising significantly in the current recessionary environment, and they are certainly not keeping up with inflation.
