How Does Inflation Erode Your Savings?

[YoungFTB]

If you have a lump sum in the bank put aside for a deposit how does inflation erode those savings?

I understand that if you get paid a fixed amount each month and the price of everything rises then everything costs you more money and you have less money to save each month.

If house prices continue to decline in price and you're not spending any of your savings then how does inflation erode your savings (deposit)?

[HomeAlone]

Wikipedia quote........... Inflation is defined as a sustained increase in general price levels for some set of goods and services in a given economy over a period of time.

That £10k you have in the bank buys less now than it would have five years ago.

[Bloo Loo]

If you have a lump sum in the bank put aside for a deposit how does inflation erode those savings?

I understand that if you get paid a fixed amount each month and the price of everything rises then everything costs you more money and you have less money to save each month.

If house prices continue to decline in price and you're not spending any of your savings then how does inflation erode your savings (deposit)?

clearly, if HP decline then clearly for any given amount of cash you have, the larger the deposit you can place, the lower the mortgage costs.

[bugged bunny]

clearly, if HP decline then clearly for any given amount of cash you have, the larger the deposit you can place, the lower the mortgage costs.

... assuming no change in interest rates or LTV ratios offered, of course.

[Minos]

If you have a lump sum in the bank put aside for a deposit how does inflation erode those savings?

I understand that if you get paid a fixed amount each month and the price of everything rises then everything costs you more money and you have less money to save each month.

If house prices continue to decline in price and you're not spending any of your savings then how does inflation erode your savings (deposit)?

If you think house prices will fall and you will be using the money you have saved to eventually buy one you needn't worry about it. If though, as a result of money printing, prices continue to rise you'll feel the effects as you'll need more money to buy one.

[YoungFTB]

Wikipedia quote........... Inflation is defined as a sustained increase in general price levels for some set of goods and services in a given economy over a period of time.

That £10k you have in the bank buys less now than it would have five years ago.

Yea I totally understand that but if you don't need to dig into those savings to buy anything (because the money is for a deposit) I don't understand how that money will be effected by inflation if house prices are continuing to decline in value.

clearly, if HP decline then clearly for any given amount of cash you have, the larger the deposit you can place, the lower the mortgage costs.

Oh of coarse!

[Mr Nice]

Yea I totally understand that but if you don't need to dig into those savings to buy anything (because the money is for a deposit) I don't understand how that money will be effected by inflation if house prices are continuing to decline in value.

Oh of coarse!

I think you are missing the point that house prices are over-valued.

you are saying that since you are saving it for an asset that is coming down in price, it's "purchasing power" is going up, so you don't have to worry about inflation.

which may be true to a degree, but without inflation, your savings would have gone even farther.

especially since the trend lately is higher arrangement fees, likely higher mortgage rates before too long, and higher deposits, that savings might be enough to get you in the door to a house, but it's effective value can be all but wiped out.

say we have some old fashioned 70s style inflation for 4 or 5 years, it could be the difference between having 10k in equity in your new home, vs. 20 if the inflation hadn't happened.

Edited December 7, 2007 by Mr Nice

[integral]

sterling like the dollar could be wiped out in a depression

wouldn't matter how much fiat you've got saved - you wouldn't be able to purchase anything with it

[Bloo Loo]

I think you are missing the point that house prices are over-valued.

you are saying that since you are saving it for an asset that is coming down in price, it's "purchasing power" is going up, so you don't have to worry about inflation.

which may be true to a degree, but without inflation, your savings would have gone even farther.

especially since the trend lately is higher arrangement fees, likely higher mortgage rates before too long, and higher deposits, that savings might be enough to get you in the door to a house, but it's effective value can be all but wiped out.

YES - the effect of cash inflation as far as an individual is concerned depends entirely on what he is valuing it against.

£1000 in the bank last year may have been 1% deposit on a house.

Today, that same £1000 may be a 1,5% deposit, so by house price decrease, your money is worth 50% more.

Buying bread however , its a different matter.

[Mr Nice]

YES - the effect of cash inflation as far as an individual is concerned depends entirely on what he is valuing it against.

£1000 in the bank last year may have been 1% deposit on a house.

Today, that same £1000 may be a 1,5% deposit, so by house price decrease, your money is worth 50% more.

Buying bread however , its a different matter.

but ultimately it gets valued as purchasing power.

having your money become worth more versus a decreasing asset doesn't mean you aren't losing value in your money.

it just means that your money isn't falling in value as fast as the houses are.

you are still better off making sure that what you have your money invested in is paying you back enough to at least cover the costs of real inflation, and hopefully a bit of profit.

[Bloo Loo]

but ultimately it gets valued as purchasing power.

having your money become worth more versus a decreasing asset doesn't mean you aren't losing value in your money.

it just means that your money isn't falling in value as fast as the houses are.

you are still better off making sure that what you have your money invested in is paying you back enough to at least cover the costs of real inflation, and hopefully a bit of profit.

Of course, all currencies are constantly decreasing in value, some faster than others- its the nature of the beast.

Good advice Nicey- Mate

[YoungFTB]

I think you are missing the point that house prices are over-valued.

you are saying that since you are saving it for an asset that is coming down in price, it's "purchasing power" is going up, so you don't have to worry about inflation.

which may be true to a degree, but without inflation, your savings would have gone even farther.

especially since the trend lately is higher arrangement fees, likely higher mortgage rates before too long, and higher deposits, that savings might be enough to get you in the door to a house, but it's effective value can be all but wiped out.

say we have some old fashioned 70s style inflation for 4 or 5 years, it could be the difference between having 10k in equity in your new home, vs. 20 if the inflation hadn't happened.

Thanks for that

sterling like the dollar could be wiped out in a depression

wouldn't matter how much fiat you've got saved - you wouldn't be able to purchase anything with it

Good point, I suppose it just depends if we end up in a recession or a depression

YES - the effect of cash inflation as far as an individual is concerned depends entirely on what he is valuing it against.

£1000 in the bank last year may have been 1% deposit on a house.

Today, that same £1000 may be a 1,5% deposit, so by house price decrease, your money is worth 50% more.

Buying bread however , its a different matter.

That's were I'm coming from.

but ultimately it gets valued as purchasing power.

having your money become worth more versus a decreasing asset doesn't mean you aren't losing value in your money.

it just means that your money isn't falling in value as fast as the houses are.

you are still better off making sure that what you have your money invested in is paying you back enough to at least cover the costs of real inflation, and hopefully a bit of profit.

What form of investment holds the least risk? At this point in time it looks like quite a lot of investments carry a lot of risk.

[brainclamp]

If you have sweated for 5 years, saved and accumulated £50,000 in savings, and everything from orange juice to council taxes to petrol to houseprices double or triple, your purchasing power has been eroded drastically.

A psychological switch eventually occurs through this slow burn theft, whereby people realise that because of the constant dilution of carefully aqquired savings, to save you have to spend, as for example items like a tin of chopped tomatoes will not be 15p by the end of next year, but 21p etc..., and will have moved more than the 4% return compensation people get from thier savings.

As people lose confidence in saving and can see real world prices ever increasing, and saving rates of return decreasing, as the BOE cuts rates, the value of money continues to be eroded, this in turn leads to very high inflation as people expect higher prices and start spendng now rather than later.

The savings rate plunges further and high or hyper inflation takes hold. The number of transactions in the economy increase as people wish to hold goods rather than money, as this occurs, nominal prices rise, which spurs more spending.

Real inflation is higher than the 4% RPI level, as most people see everyday.

[Its time to buy]

Saving money is like walking up a escalator that is going down....

http://www.richdadpoordad.com/RichDad/PodCast.aspx

Go to show 008

Why savers are losers

[CrashConnoisseur]

Inflation is a monetary phenomenon.

Inflation is an increase in the money supply in excess of that required for productive growth. As Milton Friedman famously stated: "Inflation is always and everywhere a monetary phenomenon, in the sense that it cannot occur without a more rapid increase in the quantity of money than in output."

Asking how inflation erodes your savings is like asking how adding more water dilutes your beer.

'Friedman is dead, monetarism is dead, but what about inflation?':

http://www.telegraph.co.uk/opinion/main.jh...1/19/do1904.xml

...simply because consumer price inflation has remained low, money has not become irrelevant. On the contrary: it is the key to understanding the world economy today. For there is nothing in Friedman's work that states that monetary expansion is always and everywhere a consumer price phenomenon.

In our time, unlike in the 1970s, oil price pressures have been countered by the entry of low-cost Asian labour into the global workforce. Not only are the things Asians make cheap and getting cheaper, competition from Asia also means that Western labour has lost the bargaining power it had 30 years ago. Stuff is cheap. Wages are pretty flat.

As a result, monetary expansion in our time does not translate into significantly higher prices in shopping malls. We don't expect it to. Rather, it translates into significantly higher prices for capital assets, particularly real estate and equities.

[the_austrian]

If you have a lump sum in the bank put aside for a deposit how does inflation erode those savings?

I understand that if you get paid a fixed amount each month and the price of everything rises then everything costs you more money and you have less money to save each month.

If house prices continue to decline in price and you're not spending any of your savings then how does inflation erode your savings (deposit)?

If house prices decline, that's deflation and so your savings will be worth more!!

[fingolfin]

It depends on real interest rates. In the UK, negative real interest rates are very rare. Mostly the base rate is higher than inflation. Therefore, if you keep your money in a bank account you should be able to gain a real increase in wealth

[ursamajor]

If you have a lump sum in the bank put aside for a deposit how does inflation erode those savings?

Hi,

You're ok as long as the post-tax interest you recieve on your money is at least as high as the rate of inflation. This is not always the case, real IR's were negative for many savings products when IR's were cut following 9/11 and they have turned -ve again recently, esp in the US following the latest actions of slasher Ben. The classic case of -ve real IR's occured during the 70's. -ve real IR's are one of the factors that forces up the gold price which makes gold, along with index-linked gilts, a good form of inflation protection if you fear a prolonged period of -ve real savings rates.

Rgds

UM

[Fed Up]

It depends on real interest rates. In the UK, negative real interest rates are very rare. Mostly the base rate is higher than inflation.

You jest surely. Don't tell me, you genuinely believe that inflation is 2.1%

[bdon]

YES - the effect of cash inflation as far as an individual is concerned depends entirely on what he is valuing it against.

£1000 in the bank last year may have been 1% deposit on a house.

Today, that same £1000 may be a 1,5% deposit, so by house price decrease, your money is worth 50% more.

Buying bread however , its a different matter.

very true - inflation is curiously personal - we have seen a ludicrous inflation in housing (>10% pa) but nobody seems to have considered that a bad thing ?!

my *personal* inflation is fairly low - but that's based on the things and services that I consume. for others it may be a lot higher.

[InternationalRockSuperstar]

It depends on real interest rates. In the UK, negative real interest rates are very rare. Mostly the base rate is higher than inflation. Therefore, if you keep your money in a bank account you should be able to gain a real increase in wealth

The base rate has never been higher than inflation in my lifetime.