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Mowatt Financial Planning: inflation
Showing posts with label inflation. Show all posts
Showing posts with label inflation. Show all posts

Wednesday, 18 January 2012


The latest inflation figures from the Office of National Statistics show that inflation in December has fallen. The CPI has fallen to 4.2% from 4.8% in December and the RPI has fallen to 4.8% down from 5.2%.

The biggest downward contributors to this change are petrol, gas and clothing with the only upward pressure being from landline and mobile phone charges. Of course prices are still going up, only not as quickly.

We can expect a further fall in January when the effect of the VAT increase has been included for a full year.

Monday, 18 July 2011


The inflation rates for June were published last week. Rates have in fact shown a slight fall from levels in May with CPI at 4.2% (down from 4.5% in May) and RPI at 5.0% (down from 5.2% in May).

The main drivers behind the June inflation figures were from Recreation and Culture where prices fell between May and June this year whereas they went up last year.

Generally this was a bit of a surprise and the expectation is that inflation is likely to go back up again and stay high for the rest of the year.

As ever, the actual inflation experienced by individuals is likely to feel different. According to research by Alliance Trust, inflation for those aged between 64 and 74 is 5.1%. The reason for this is that pensioners will have more of their living costs on heating and food where inflation is going up than games and electrical goods where inflation has fallen.

Tuesday, 17 May 2011


The latest inflation figures released today for March show CPI going up to 4.5% from 4.1% and RPI going down from 5.4% to 5.3%. See more detail on the ONS site.

The main difference between the two measures are the costs included (RPI includes mortgage interest and other housing costs) and the method of calculation (RPI excludes the highest earners and some pensioners dependent mainly on state benefits).

According to the Bank of England Quarterly Inflation Report, the outlook for inflation remains high for the remainder of the year and above the target of 2% in 2012. The view is that inflation is then likley to fall through 2012 into 2013.

The chart to the right shows the Bank of England inflation projection.

Clearly the inflation rate is more uncertain the further away the forecast.

Monday, 16 May 2011

Index-linked savings certificates

Last week National Savings & Investments relaunched a 5 year index-linked savings certificate. There should be a place for them in most portfolios.

They are not quite as good as the previous issue: lower interest rate above inflation (0.5% on average) and only 5 year term available. However, they can be cashed in before the end of the 5 years.

The interest is as follows:

Year 1 RPI plus 0.25%
Year 2 RPI plus 0.35%
Year 3 RPI plus 0.4%
Year 4 RPI plus 0.65%
Year 5 RPI plus 0.86%

The proceeds are tax free.

Although you might be able to get a better deal on a fixed term bond, with these you know you are protected against inflation.

The big unknown is what will happen with inflation. Currently the RPI is at 5.3% and the expectation is it will stay high for some time before it falls.

The comparison below shows how the return might vary under different inflation scenarios and also shows the return against a 5 year fixed term bond and a variable rate savings account.

Returns are for an initial investment of £5,000 and represent the value at the end of the 5 year period.

The returns under the index-linked savings certificates vary from £5,909 to £6,291 under the different inflation scenarios. Importantly there will be no tax to pay.

The returns under the 5 year fixed term bond are £6,095 (net of basic rate tax) and £6,397 for a non-tax payer.

The forecast returns under a variable rate savings account vary between £5,944 and £6,200 for a non-tax payer.

I believe it's a good idea to hedge your bets and with the uncertainty of exactly where inflation will go, index-linked savings certificates are a good option for some savings where the goal is 5 to 6 years away.

Scenario 1: Inflation of 5%, 3.5%, 3%, 3%, and 3% over the next 5 years.
Scenario 2: Inflation of 5%, 3.5%, 2%, 2%, and 2% over the next 5 years.
Scenario 3: Inflation of 5%, 4%, 4%, 4%, and 4% over the next 5 years.
Fixed rate 5.05% (currently available from Birmingham Midshires)
Variable rate: 3%, 4%, 5%, 5%, 5%

Thursday, 10 March 2011

Base Rate

The bank of England base rate will remain at 0.5%. This is the decision of the Monetary Policy Committee which met this morning.

From what I have read and heard this is the right decision as increasing interest rates now could jeapordise the much needed recovery in the UK ecomony. Although inflation is currently running at 4.0% (January figures) this is largely as a result of VAT and the cost of goods such as fuel. An increase in interest rates would hit consumer spending power in an already fragile market.

Although it is hard to predict, assuming that the economy is showing the right growth pattern, an interest rate rise is likley within the next 12 months.

Wednesday, 2 February 2011


The inflation figures recently announced for December were 3.7% (CPI) and 4.8% (RPI). The largest upward pressures in December were air transport, fuel and lubricants, gas and food. More detail is available on the ONS site.

The expectation is that these have further to rise and are likely to stay above the target inflation rate of 2% during 2011. This is likely to be driven by the recent increase in VAT and the increasing cost of imports.

Now these are averages and the inflation rate that any individual experiences will depend on their spending. The Office of National Statistics have developed a Personal Inflation Calculator which works out your personal inflation rate based on your expenditure. Inflation for the Mowatt family household comes out at 6.5% for December 2010. Obviously buying the wrong stuff!

In a similar vein, Age UK recently developed a measure called the silver RPI which is aimed at looking at the inflation rate of those in later life. They found that the rate of inflation increased with age. The table below shows the additional rate of inflation above the average RPI by age band:

Age Band Additional rate
55-59 1.8%
60-64 2.6%
65-69 3.3%
70-74 3.8%
75-79 4.1%

There are a number of factors which affect this but for example the 75-79 age band spends twice as high a proportion of their income on energy compared to the 55-59 age band.

This brings us to the so what? There is a real dilemna here. Since the withdrawal of index-linked savings certificates, it is difficult to find a safe investment to protect against inflation. Of course if you already have some you can roll them over.

Currently the only deposit based option is with Birmingham Midshires which has a 5 year bond available paying inflation plus 0.25%, however, the interest will be taxed. Beyond this it is possible to invest in index-linked gilt funds although the capital is not guaranteed in this case. Other assets which have traditionally provided some protection against inflation are property and equities. The capital risk is higher with these assets.

My view is that there is a need to take some risk with capital to give protection against inflation, otherwise the value of capital will be eroded by inflation in any event. How much risk to take will, however, depend on personal circumstances and risk appetite.

Saturday, 20 February 2010

Savings and Inflation

The latest inflation figures announced during the week show that inflation has risen to 3.5% (Consumer Price Index) and 3.7% (Retail Price Index). This means that your savings have to work pretty hard to produce a real return.

In fact for a higher rate tax payer you need to be earning 5.83% and for a basic rate tax payer 4.375% just to be standing still in real terms.

Clearly these figures are for January and what's important is the future trend for inflation. From what I've read and heard the consensus is that we will continue to see inflation but it is likely to fall back from this level. This is confirmed by a You Gov expectations survey which has a 12 month view of inflation around 2%.

Below is a chart which shows the best rates available according to Moneyfacts:

What is important is when you will need any money you have invested. If it's more than 5 years you can afford to introduce a bit of investment risk with the aim of getting better longer term returns. If it's under 5 years you will generally want your money to be safe. If you are able to invest for 3 years or more, index-linked savings certificates are a good way of making sure your money holds it's value in real terms. The returns are also free of tax. There are two series available; one for 3 years and one for 5 years and both pay 1% above inflation. It's possible to invest from £100 to £15,000. You can get more details on the National Savings and Investments site.

Assuming inflation is at 2%, a basic rate tax payer would need to earn 3.75% and a higher rate tax payer 5% to get equivalent returns. There is also the certainty that if inflation is higher you will be protected against this. If you know that you can leave the money for 3 years, index-linked certificates look like a good option whereas if you know you will need the money sooner you have to accept that your money could be losing value in real terms.

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