Every time the inflation numbers come out, we are told that, while the news is terrible for savers, it is good news for debtors. But is it really? This idea that inflation is a good thing for those that owe money is based on the idea that inflation devalues the debt or at least that the asset against which the debt is held goes up in price so much that the debt becomes of no consequence.
Consider the case of someone who bought a house in the early 1970s. Inflation soared. But so did nominal wages and house prices. So by the 1980s he was in a pretty good position. His house would have been worth double or triple the nominal sum he paid for it and his wages would have risen by a similar amount. His mortgage debt would have become almost irrelevant to his finances.
But things aren't the same these days. Inflation might be going up but house prices aren't (so a mortgage isn't making you any money) and neither are wages. That means that inflation is no better for debtors than for anyone else. Today's inflation eats away at their disposable income (they have to spend more on food and fuel) but they aren't compensated by rising house prices or by rising wages instead of being easier to meet, their mortgage payments get harder to meet as their real income continues to fall. Inflation can't deflate debt all by itself. Only inflation alongside higher asset prices and higher wages can do that.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
So what next? There is a view that real wages will soon start rising again and that house prices will do the same. Regular readers will know my views on the latter but I'm no more confident on the former. I interviewed Aberdeen's Bruce Stout this time last year. He noted that real wages have gone nowhere in the UK for a decade and forecasts that, thanks to the ongoing credit crunch and the economic shift from west to east, they wouldn't for another decade. Go up to Stockbridge (a fashionable part of Edinburgh) today, said Bruce, and "I can guarantee that Costa will be full of people having £2 coffees and £3 paninis". They won't be there in a decade.
Truth is that "if you go on a credit binge for 20 years, there is going to be one heck of a howl" as it comes to an end. People have "no idea" quite how much their living standards will have fallen by the time the debt problems in the West have finally worked themselves out.
Bruce's forecasts have come pretty good so far. As long asBruce is right and real wages continue to fall - Britain's inflation problem will be no better for debtors than it is for savers.
-
Thousands of Neil Woodford investors sue Hargreaves LansdownMore than 5,000 people who invested in Woodford's collapsed equity income product are taking Hargreaves Lansdown to court
-
Is now a good time to invest in gold?In the current market conditions, is gold a good investment? We explore the reasons why now might be a good time to put some money into gold.
-
Beating inflation takes more luck than skill – but are we about to get lucky?Opinion The US Federal Reserve managed to beat inflation in the 1980s. But much of that was down to pure luck. Thankfully, says Merryn Somerset Webb, the Bank of England may be about to get lucky.
-
Rishi Sunak can’t fix all our problems – so why try?Opinion Rishi Sunak’s Spring Statement is an attempt to plaster over problems the chancellor can’t fix. So should he even bother trying, asks Merryn Somerset Webb?
-
Young people are becoming a scarce resource – we should value them more highlyOpinion In the last two years adults have been bizarrely unkind to children and young people. That doesn’t bode well for the future, says Merryn Somerset Webb.
-
Ask for a pay rise – everyone else isOpinion As inflation bites and the labour market remains tight, many of the nation's employees are asking for a pay rise. Merryn Somerset Webb explains why you should do that too.
-
Why central banks should stick to controlling inflationOpinion The world’s central bankers are stepping out of their traditional roles and becoming much more political. That’s a mistake, says Merryn Somerset Webb.
-
How St Ives became St Tropez as the recovery drives prices sky highOpinion Merryn Somerset Webb finds herself at the epicentre of Britain’s V-shaped recovery as pent-up demand flows straight into Cornwall’s restaurants and beaches.
-
The real problem of Universal Basic Income (UBI)Merryn's Blog April employment numbers showed 75 per cent fewer people in the US returned to employment compared to expectations. Merryn Somerset-Webb explains how excessive government support is causing a shortage of labour.
-
Why an ageing population is not necessarily the disaster many people think it isOpinion We’ve got used to the idea that an ageing population is a bad thing. But that’s not necessarily true, says Merryn Somerset Webb.
