This week we learnt something I suspect most of us already knew: inflation is high and rising. UK data for April has the consumer prices index (CPI) rising at an annual rate of 9%, a 40-year high. Measured by the retail prices index (which CPI replaced) it’s 11.1%. It was last 11% in February 1982, having breached 11% for the first time since January 1952 in January 1974. In short, 11% really doesn’t happen very often.
However, here is something that has never happened: 11% RPI and 1% bank rate. In early 1974, the rate was 12.7%. If you’d had cash in the bank, you’d have made a real return (ie, beat inflation) for much of the 1970s. There were nasty bits in the mid-1970s when RPI inflation breached 20% and rates were just 15%, but in all, holding cash in the 1970s wasn’t as destructive to your wealth as you might have thought.
Two points on this. In the 1970s, inflation was caused mostly by external factors (such as the sharp rise in energy prices in 1973). High interest rates proved all but useless in tackling that – at the end of 1973, inflation was 10.6% and rates 13%.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Our central banks might talk a big game on rates, but look back to the 1970s and you might think they are merely indulging in gesture economics. They can’t get rates to 11%-plus without crashing everything – and given that they know it won’t work, why try? Federal Reserve chair Jerome Powell this week said that “no one should doubt” his resolve. The Fed, he says, will push until inflation comes down in a “clear and convincing way”. Bet it doesn’t.
Making a real return
The other lesson is that you won’t make a real return on cash this year. Every penny in your account will steadily lose large amounts of its value (until you give in and spend it). After ten years of 9% inflation, £100 will be worth £42. An aside: I am glad, for the purposes of this example, that UK inflation is 9%; the online calculator I used only goes up to 9%. Presumably the young people who designed it could not fathom anything higher. Time for a refresh.
The commentary on all this is miserable. Seven out of ten people plan to cut their energy consumption; two thirds are changing their shopping habits; 20% plan to borrow to cover expenses; and so on. What should you do? The papers are full of tips: stop buying coffee, buy cheaper-brand goods, bulk buy, rent out your driveway (earn “passive income”!). None of this is much help – if you really want to survive this, you need to beat inflation, not be beaten by it.
Start by ensuring you get what interest you can on your cash (Investec offers 2%, so you can cut your real-terms loss to a mere 7%). Shift some money into one of the few things with any chance of beating inflation – listen to our podcast (moneyweek.com/podcasts) on this (commodities and more commodities, says Barry Norris).
But most vital of all, make more money. An MP was much mocked this week for telling people to get better-paid jobs to beat the cost-of-living crisis. Her detractors have a point, but they miss one too: the labour market is very tight (the unemployment rate is 3.7% and there is more than one vacancy per unemployed worker). If you move job you will almost definitely get a better deal; stay put, and you have an excellent chance of getting one too. I have said this before, but with the RPI at 11.1%, it is worth saying again: ask for a pay rise.
Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).
After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times
Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast - but still writes for Moneyweek monthly.
Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.
Five things not to put in a will
There are many things to consider when writing a will. But what about things NOT to put in a will? We spoke to legal experts who told us about what you should leave out of a will.
By Nicole García Mérida Published
Autumn Statement: Households still face an extra £4,000 tax bill despite NI cuts
News Autumn Statement tax give-aways will be offset by fiscal drag, the Resolution Foundation warns
By Marc Shoffman Published
UK wages grow at a record pace
The latest UK wages data will add pressure on the BoE to push interest rates even higher.
By Nicole García Mérida Published
Trapped in a time of zombie government
It’s not just companies that are eking out an existence, says Max King. The state is in the twilight zone too.
By Max King Published
America is in deep denial over debt
The downgrade in America’s credit rating was much criticised by the US government, says Alex Rankine. But was it a long time coming?
By Alex Rankine Published
UK economy avoids stagnation with surprise growth
Gross domestic product increased by 0.2% in the second quarter and by 0.5% in June
By Pedro Gonçalves Published
Bank of England raises interest rates to 5.25%
The Bank has hiked rates from 5% to 5.25%, marking the 14th increase in a row. We explain what it means for savers and homeowners - and whether more rate rises are on the horizon
By Ruth Emery Published
UK wage growth hits a record high
Stubborn inflation fuels wage growth, hitting a 20-year record high. But unemployment jumps
By Vaishali Varu Published
UK inflation remains at 8.7% ‒ what it means for your money
Inflation was unmoved at 8.7% in the 12 months to May. What does this ‘sticky’ rate of inflation mean for your money?
By John Fitzsimons Published
VICE bankruptcy: how did it happen?
Was the VICE bankruptcy inevitable? We look into how the once multibillion-dollar came crashing down.
By Jane Lewis Published