Inflation Increases – So What!

In March 3, 2016
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inflation

Last month, UK inflation increased to 0.3%. This is a 0.1% rise on the previous month.

It is important to remember that the inflation rate (RPI in this case) is a reflection of a year-on-year increase. In other words, the inflation rate reflects only the last 12 months’ figures – as the new month is included, the “oldest” month’s figure drops out. Because of this, changes in the speed of rises and falls can influence the inflation rate.

For example, petrol prices at the pumps are falling (commonly 0.99p in the South!), and have done for over a year. However, the speed at which they are falling is slowing. This has the effect of actually increasing inflation as measured by RPI, even though prices are still falling! I know this makes little sense, but that is the way it is done. Therefore, even though inflation has increased to 0.3%, the prices you and I are paying are still falling (thank goodness!).

All of that said, a 0.3% rate of inflation is so low that it makes no real difference. Those of us old enough to remember the 1970s will realise that 0.3% might as well be zero.

With such a low inflation rate, it is obvious that Investments do not need to grow as fast. In the 1970s, when inflation was probably averaging 8% or so, your Investments needed to earn 8% just to stand still. A return of 12% sounded great, but was actually only 4%. In the same way, with inflation at 0.3%, you cannot expect returns of 8%, 9%, 10% or 11%. A return of 5% is pretty much a real return of 5%, which would equate to a return of 13% in the 1970s.

Of course, with the stock-markets around the world crashing this year, any return would be a lovely thing!

 

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