Now any regular reader will know that we always harp on about the threat of inflation being too high, indeed the Bank of England is legally charged with keeping this under control (2% is seen as satisfactory long term) but could inflation now come to the rescue of Governments and the population whose debts are at record highs?
If you were around in the 1970’s, you should remember double-digit inflation rates and the constant union lead pay rises that resulted which then lead to double-digit interest rates and generally extremely unstable finances for the population of the UK. Imagine paying a 16% mortgage interest rate? Fast forward to today, inflation (as measured by CPI) stands at a very low 0.7% with interest rates low as a result (0.1%). As inflation is off the 2% target, the Bank of England would normally reduce interest rates to re-stimulate demand and bring the rate back towards 2%. However, negative interest rates – never done in the UK before may well have unforeseen consequences! History shows us that inflation can destroy wealth and economies and policy makers know it!
However, think about it in reverse and lets leave aside the threat of inflation as noted above, where you have far too much debt, you could (in theory at-least) stoke inflation higher and inflate away your debts! You can basically reduce the “value” of your debts without anyone realising. Here is the maths in very simple terms:
Inflation rate: 10%
The “real value” of your debt basically decreases by 10% for each year.
So, in this situation, over 5 years whilst the debt is still £100,000 – its real value is now £50,000!
Wow – so why don’t we just get inflation up a bit? I hear you say! Simple, inflation is a very dangerous game with consequences that can get out of control very easily. Zimbabwe, Argentina and Venezuela will currently testify that it can leave your economy in ruins – think about it… if a car was going to cost 10% less tomorrow in “real terms”, why would you buy one today?
Worried about inflation? Get in touch with your local experts today and build your very ow Financial Fortress!