Inflation - we are running a piece on why it may be good

"The current level of UK inflation has seen interest rates, and therefore cash deposit rates, rise. Cash savers will at least see a higher return and although, in the short term, the real return is negative, the hope is that inflation will fall in the years ahead. For example, the Bank of England's forecasts are for inflation to drop below their 2% target in two years. Interest rates, however, are likely to remain at higher levels to ensure inflation stays low, which is good for savers. "Inflation has also pushed long-term UK government bond yields higher. The 10 year gilt is around 2%, a level that we haven't seen since 2015. For people investing in bonds now, whether in their pensions or ISAs, this means that the long-term returns of the risk free asset should at least match the Bank of England's long term inflation target of 2%, making their portfolios' real returns more predictable. "For those invested in bond funds, although this year there have been losses as yields have increased, coupons and maturing bonds in the funds will be reinvested at higher yields improving the long term returns. "A measured rate of inflation is positive for the economy as it goes hand in hand with economic growth. Falling prices leads to lower consumer spending and growth as people hold back in anticipation of lower prices in the future. It also tends to lead to wage growth eventually."

"The often overlooked aspect of steady inflation is that it can be beneficial to some individuals who have large debts such as mortgages. Why? Because if the mortgage rate is fixed at a low level, the borrower should benefit from rising wages and a rising house price, without having it affect their debt repayment. The popularity of 5 and even 10 year fixed rate mortgages has increased in recent years and these people are potentially set to benefit. The other significant beneficiary is the Treasury as government debt, or Gilts, are usually at a low fixed rate. This means that inflation will erode the true value of the debt over time. With the high levels of government debt accrued during Covid, that may be very welcome."

High inflation has an insidious, corrosive effect on society, and is undoubtedly a Bad Thing. But if we're looking for a silver lining - it may bring some sanity back to the debate around monetary policy and put an end the "magic money tree" mentality that has prevailed since 2008.

"The Bank of England has an inflation target of 2% because it believes a mild amount of demand-driven inflation is a good barometer of the economy. We are a long way off 2%. Inflation at 9% is not good for anyone, especially those who are worse off. There is no good news here."

"Inflation can help borrowers by eroding the value of debt such as mortgages, while pushing up asset prices, but that won't feel like a positive to millions of households right now. Moderate inflation is considered to be good for the economy, hence the Bank of England has a target of 2% inflation. Like all things, inflation causes winners and losers, with cash savers and low income families tending to get hit hardest as their spending power decreases. Also, unemployment tends to be low when inflation is high."

"Higher interest rates to counter inflation should also mean pension annuities increase, so it could be could news for those approaching retirement. Inflation could also help mortgage borrowers who are on cheap long-term fixed rate deals. They'll be paying back the mortgage with money worth less than when it was borrowed, inflating away the debt effectively."

"Inflation can be a good thing for those with debt. The mortgage balance becomes "smaller" relative to the cost of everything else, as everything else increases. This is only a good thing if you can continue to pay your mortgage each month though."

Inflation might mean a squeeze on household budgets, but generally, moderately rising prices are seen as a good thing for the economy. It encourages consumer spending and boosts ecomomic growth. After all, if you know things will become more expensive in the future, maybe it's better to buy now? The opposite, deflation, is when prices fall. This can cause wages to stagnate or even drop, leading to reduced demand and unemployment. But it's hard to see how high inflation is good for savings and pensions. Even if interest rates rise, money in the bank will still lose its spending power over time. Pensions need to be carefully invested to achieve the right balance of growth and stability. The folks that benefit most from high inflation are those will debts. In real terms, the value of loans and mortgages begins to erode. Imagine how relieved the government will be when national debt decreases due to inflation. £1 billion of debt last year is now worth a 'mere' £910 million in real terms!