Three good things about inflation

1 December 2011

Adjectives that have preceded the word 'inflation' in the media over the last few months include 'spectre', 'damaging' and even 'devastating'.

Like all official national statistics, the word inflation masks simple concepts in grossly complex language. And, of course, famously, economics attracts more opinions than bees round honey so that just serves to confuse us all the more.

And we associate this with bad stuff and bad words.

But is inflation all bad?

There are two calculations that matter to us, the consumer prices index (CPI), which is based on tracking the price of more than 120,000 prices of 650 consumer goods and services both online and high street, and then there is the retail priced index (RPI), which adds in other vital costs of living such as mortgages and council tax.

To put this in plain English, if the CPI is quoted as 3% and the price of our goods and services is 3p in the pound higher next year, that tank of petrol is £51.50 and not £50 and so on. The RPI – when interest rates are higher than they are now – is of course higher than CPI.

In that regard inflation is a bit like cholesterol - there is bad, high inflation which, unchecked, is extremely damaging to our financial wellbeing, and good, relatively low inflation (say 2 – 2.5%) which helps businesses and therefore the economy, to grow.

But it's not, it's 5% and that's just off a high of 5.2%.

Bad inflation claws away at your savings, makes your bills go up and renders your wages less efficient.

But good inflation comes around when you are in debt.


Inflation is only beneficial to those of us who borrow money and that's quite a few.

Mortgagees are the obvious beneficiaries of high inflation but even in this large community - there's 11.25 million outstanding mortgages in the UK as of the second quarter of 2011 totalling £1,088 billion - 30% of that is on fixed-rate. You may be paying through the nose on your rate but inflation is munching away at the capital loan like a faithful termite.

Double benefit arises for those on a variable rate.

This means – deploying some schoolboy maths and conveniently ignoring that balances will be at varying levels – the holders of 7.875 million mortgages will be enjoying watching their loans being inflated down while their repayments are at rock bottom.
So that's a good thing.

The same goes for anyone with an outstanding personal loan. Let's say you have a typical £10,000 loan at an attainable APR of about 6.2% over five years. You'll have a total repayment amount of about £11,650 with a monthly repayment of just under £200. So 5% inflation means that repayment in real terms goes down by a tenner a year.

Again, I stress this is all theoretical and over-simplified, but I bet you are feeling better already.

For the third and final good thing about inflation, and stretching the imagination a bit – ask the governors of the battered Eurozone economies how much they secretly appreciate a 3% inflation rate. Because 3% of trillions is quite a lot.

So there you have it. Cheer up now.