Why inflation won’t help today’s homeowners

Not everyone is worried by the recent rise in inflation. Mervyn King still stands by his view that it is just a blip – a long blip, but still a blip.

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And homeowners across the country are welcoming it with mutterings about how it will erode the value of their debt, making it less of a burden on them in the future.

Big mistake. Inflation may erode the real value of the debt in theory. But it can’t reduce the monthly burden of the debt unless wages are rising too. And they are not. We already know that the new government is planning a freeze on all public sector salaries above £100,000. But it isn’t just the very well paid who are likely to see their nominal wages stay static and their real wages fall.

The retail price index may now be rising at over 5% a year, but can you really see the tax-paying public agreeing to nominal wage rises of 5%-plus for any public sector workers? I can’t. And that suggests that real wages for the millions of people dependant on public sector cash are on the way down, not up.

The same goes for the private sector. With unemployment high and rising, there is little pressure on companies to offer higher wages than they already are. And the stats tell us pretty clearly that real wages in the private sector are coming down too.

So what is inflation actually doing for today’s debtors? Increasing their cost of living (via rising oil prices and food prices) and leaving less money for interest and debt payments. So the higher it goes, the more of a burden the debt becomes – not vice versa.

It might work the other way around for the corporate sector, if they get to raise prices while keeping real wages down. But if you’ve over-extended yourself on your mortgage and credit cards, don’t make the mistake of thinking that today’s inflation is in any way your friend. It isn’t.