Merryn's Blog

Why UK savers should be grateful for inflation

The latest figures show that inflation really is raging. Savers are rightly angry about this. But those hoping for higher interest rates should be careful what they wish for.

So, inflation really is raging. Today's numbers show the Consumer Price Index (CPI) rising at 3.7% a year and the Retail Price Index (RPI) - the number most of us still think of as measuring our own inflation rate - at 4.8%.

So what next? There is growing pressure from savers' representatives, from pension pressure groups and, in public at least, from the Prime Minister himself, on the Monetary Policy Committee to read up on their brief (to keep inflation knocking around 2%) and to get on with raising rates. You can see why - it doesn't seem right that anyone with cash should be seeing it lose value in real terms every day, while anyone in debt appears to be getting something of a free ride from the ultra-low rates on their mortgages and so on.

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But those calling for action should be careful what they wish for. A rise in interest rates might not cause the sudden rise in mortgage rates everyone expects (banks would find it in their own interests to squeeze their currently high margins a little), but it would certainly increase the number of foreclosures and bankruptcies across the board.

It would also cut investment and, by strengthening sterling, give our fragile manufacturing sector a knock it really doesn't need. It would also hit the stock market, something even the nation's angry savers probably wouldn't fancy much. Having a slightly higher annuity rate wouldn't be all that great if its price was a 10% fall in the value of your pension fund. And of course it wouldn't actually have any effect on the big cause of our inflation - rising global commodity prices.

I hate inflation for the same reasons everyone hates it - it debases our currency and steals from the prudent. But these days, needs must. We have a very fragile and grotesquely over-indebted economy. Low rates and inflation help with both. Which means that for now at least, we are stuck with them. Debtors should be grateful for this. And irritating as it surely is for them, UK savers probably should be too.

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This will change - King can't let inflation expectations get out of control, particularly given the evidence that the economy is picking up (consumer confidence just jumped to a four-month high) - just not quite yet.

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