Home—Blog—Why inflation won't help today's homeowners
May 20, 2010, 11:28
Posted byMerryn Somerset Webb
Comments (9)
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.
See also • Use your mortgage to beat inflation
See also
• Use your mortgage to beat inflation
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.
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(21 May 2010, 09:59AM) Complain about this comment
employment is via a public- private partnership for me, and guess what? no pay increase. I guess Local Authorities cannot afford much wage increases, as more of their funds have dried up as people claim Council Tax benefit as they have lost their jobs, rather than pay their tax and bring money into the LA coffers. no pay increase and high inflation means less disposable income, and less cash flow in the economy, resulting in a deeper recession.Thanks Gordan Brown for betting EVERYTHING on property values and the property bubble.
(21 May 2010, 10:25AM) Complain about this comment
Bit of a short-termist view there, Merryn. Not thinking of a career in politics, are you?It's indeed true that the rapidly-rising inflation rate will cause short-term pain, but not as much as an interest-rate rise might. Higher inflation ultimately filters through to asset prices and debts, which is why the UK government has been addicted to it for most of the last century.And this one too, probably, and that will affect the RoI of UK businesses. Whatever way it goes, there's gonna be a lot of pain for a long time. Or perhaps pain is merely "getting real" as Corporal Clegg was fond of putting it.
(22 May 2010, 08:03AM) Complain about this comment
Excellent post. MSW has a timely way of focussing on what will become pressing issues, and inflation is a word and concept that will dominate this parliament.
(24 May 2010, 03:04AM) Complain about this comment
Step 1: Create an immediate CTG net around the country of 50%.Step2: Once the net is in place, force up interest rates to 6 or 7%.Step 3: Combination of high unemployment + sales of second homes and unlettable properties forces sale or repossession.Step 4: Collect as much capital gains tax as possible. Pay down the debt, protect the pound, reduce inflation, give value to bonds. Step 5: Increase employment by localized building strategy and increased home building. No more national targets...Step 6: House price crash, permanent and forever. Inflation keeps rising. Riots in the streets. Half bottle petrol bombs because petrol is too dear. Step 7: Immigrant communities are targeted. The rise of fascism. Step 8: No work, no food, no shelter leads to revolution.Step 9: The future is in Asia, unless ww3 turns up soon.Step 10: Enjoy each day as it comes. Ce la, ce la....
(24 May 2010, 12:36PM) Complain about this comment
...most important aspect is not said clear enough: if there is inflation, also interest rates go higher. So if your mortgage changes from 5% per annum to 15% (because onflation is even 17% and nobody makes bank deoposits when he gets much less than compensation for inflation) , banks have to pay more for saving accounts, and hence debit more for mortgages. Its as easy as that. You may be ruined by the higher rate, although the value of the hosue will climb faster, your starve..
(24 May 2010, 08:52PM) Complain about this comment
On the surface you are bang on. However, you forgot to mention QE AKA printing money.Thats where the money will come from to boost wages.Great post, you fooled me for a while!
(25 May 2010, 12:17AM) Complain about this comment
"On the surface you are bang on. However, you forgot to mention QE AKA printing money.Thats where the money will come from to boost wages."Why would companies give that to workers, when there's 2.5>3 million of them on the dole? Replacements will be as cheap as chips!The QE is being wasted by our profligate financial institutions as we speak, they'll need some more soon!
(25 May 2010, 05:35PM) Complain about this comment
Why would companies give that to workers, when there's 2.5>3 million of them on the dole? Money will find its way from financial institutions to mainstream eventually. They are nor sure where the last £200 billion has actually gone!!! Keep one eye on luxury goods, this is where the money will enter the "food chain"
(25 May 2010, 11:15PM) Complain about this comment
Luxury goods, like BMW's? So it'll end up in Germany, if it hasn't already.
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