E Why Inflation Protection Doesn't; Gold; Hyperinflation; Cataclysm

Inflation hits hard. At the start of the Seventies, if you were a retired company director on a fixed pension, you might well have been driving a car. By the end of the decade, you might have been on the bus, instead. And so, in the wake of the "oil price shock" and other inflationary factors, governments felt obliged to start protecting pensions and social security benefits.

But just how well does inflation protection work?

That's a can of worms. Official calculations use a variety of notional baskets of goods and services and probably none of them quite matches the way you spend your money. Besides, there are dodges like hedonic adjustments: for example, if a new computer costs the same as your old one, but has twice the memory, its notional price could be deemed to have halved, even if the extra power makes no difference to you - we're not all gamers and streamers.

Still, let's say that the government does get it exactly and fairly right for you, uplifting benefits annually. You still lose, and here's why. Let's assume that inflation happens steadily over the year, and let's take the UK in 1975 for example. The figure for price inflation in that year varies according to source, but we'll use the 24.11% annual rate given on this site. Imagine that you earn and spend 1,000 monetary units per month, and at the end of the year your income is adjusted in line with RPI. Here's what happens:


At that rate, in 8 years you have lost a year's income; in a working lifetime, the income-multiple equivalent of a house. And that's when the government gets it right.

Or, your employer. No wonder the 1970s (and before) were bedevilled by industrial action. It wasn't all revolutionary socialists fomenting trouble - so many disputes (as I recall from news broadcasts at the time) were about the indirect effects of inflation: the struggles for (a) pay parity with other similar groups of workers and (b) pay differential.to reflect the additional value of more highly skilled work. 

1 2 3
View single page >> |

Disclosure: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog; or for ...

How did you like this article? Let us know so we can better customize your reading experience. Users' ratings are only visible to themselves.


Leave a comment to automatically be entered into our contest to win a free Echo Show.