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Inflation: Who are the winners & losers

26 October 2011

The rate of inflation has skyrocketed recently and official figures released last week suggested the rate had reached 5.2% for September. The fragile state of the UK economy is having a detrimental effect on household finances across the country.

Low-income households may have been hit the hardest from inflation with the increase of household bills, food and general living expenses. However, those claiming benefits, for example, could expect an increase in various benefits such as child benefit.

Inflation affects everyone and there are numerous ways it could benefit or hinder your finances.

Here is a quick guide on how the increased inflation rate may affect you;

Winners

Not many will stand to gain from the situation as high inflation ultimately pushes up the cost of living. However, there are some minor benefits that may bring comfort to a relatively small percentage of the population.

Borrowers

Inflation is good news for those with large debts, as it effectively reduces the debt value in real terms. Those with mortgages, for example, could benefit from a higher inflation rate.

Should house prices continue to fall though, mortgage holders will find their debt will still be larger than the value of their property, even if it has been reduced by inflation.

Compare mortgages with Money Expert.

Should inflation remain at 5.2% for the next 12 years, large debts could effectively be cut in half. However, the idea of inflation remaining this high for 12 years is questionable.

The Bank of England is unlikely to increase the interest rate from 0.5%, which means that for now, those with significant debts can make the most of high inflation. The government, for example, will see the national debt levels decrease in real terms.

Savers

Those with inflation-linked savings will also benefit from the higher inflation rate. Anyone with an NS&I Index-linked Certificate, who bought them before they were removed from sale, will be pleased to see their returns increasing. High inflation results in higher returns. However, the higher return might not be as much as it would have been on a fixed term financial product.

One silver lining amid the dark cloud of inflation is that tax-free savings account limits will be increased. From April 2012, the ISA alliance will rise from £10,680 to £11,280. This is because the tax-free allowance is working in line with the Consumer Price Index, which increased to 5.2%.

Compare ISAs with Money Expert.

The Post Office has an inflation-linked bond available which pays 0.5% RPI for three years, or 1% plus RPI over five years, based on January’s RPI figure.


Losers

Savers

Savers could look at rising inflation in an entirely different way though. Some savers have dubbed recent developments as a ‘slow motion bank robbery’. This is because it has effectively reduced the spending power of money kept in the bank or building society. Those with a nest egg of savings will see them diminish even faster as top rates on long-term savings fall further behind the rate of inflation.

Not only have savers been hit with high inflation but, to make matters worse, they also have low interest rates to deal with. There are still some inflation-linked products on the market. However, there are few regular savings accounts that would beat inflation in the current market.

Compare savings accounts with Money Expert.


Pensioners

The latest research has found that those on a fixed income would have been hit the hardest by the latest increase of inflation as spending power has been reduced.

Today, a 90-year-old who retired in 1981 aged 60 would have seen the purchasing power of a £10,000 per year pension income fall to just £3,207 in the past 30 years. Standard Life research found that inflation could reduce pensioners’ spending power by 68%.

To add salt to the wound, pensioners spend the majority of their income on fuel and food. These two products have seen some of the biggest recent price increases. Food prices were 6.4% higher for September than in the same period a year ago.

Research from Alliance Trust found that older households spend 9% of their income on energy whilst those under 30 spend less than half this figure. The rising price of gas and electricity made a significant contribution to the increased rate of inflation.

The research suggests that pensioners saw a 6.1% increase in prices for those aged 65 and over.

Compare pensions with Money Expert.

The squeeze on living standards is reaching breaking point for many. The higher rate of inflation, combined with already tightening purse strings, brings little comfort for the majority of the British population.

Research from the Post Office found that 93% of people are worried about the effect of inflation on their finances, and with good reason. With interest rates remaining at a record low, and the possibility that inflation could increase once more in the run up to Christmas, their will soon be less winners and significantly more losers in this situation.

  • Has the Government thought about what will happen in, say, ten years time when the effects of years of high inflation and low savings rates which have been reducing pensioners' savings means costs of nursing and care to the elderly will fall on the NHS and care providers. They simply won't have the savings they had put by for these purposes.

    Patricia  |   Cheltenham  |   28 Oct 2011

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