What we worry about most
Last week the inflation numbers gave a good many people a bit of a shock. The Consumer Price Index was up 5.2% on last year, and the Retail Price Index up 5.6%. MoneyWeek readers probably weren’t that surprised – we’ve been warning about inflation for a long time now. But when people congratulate us for being right on inflation, I do feel the need to point out that we haven’t been right on this just yet.
Inflation at this level is horrible. It means the value of real assets is falling by much more than you think (house prices adjusted for inflation are down 25%-30% since 2007). It means that your savings are losing 4%-6% of their purchasing power every year. And it means that ordinary salaried borrowers, as their real wages fall, have even more trouble meeting their obligations than before. Pretty much the only people this kind of inflation helps is the government – assuming, as City AM’s Allister Heath points out, that George Osborne pays out less extra in benefits and the like than he makes from cutting real-term spending on public-sector services and wages.
However, the inflation we have seen so far is not actually the inflation we worry about most. That will be far worse. This round is partly to do with the falling pound, partly to do with energy prices and the rising costs of services, and of course, to do with tax. So it is perfectly possible that it will – as Mervyn King keeps promising – fall back fast next year.
• Read the full editor’s letter here: What we worry about most.