Is there a silver lining for consumers to the increased inflationary pressures?
Emma-Lou Montgomery, associate director for personal investing at Fidelity International, says YES.
A little inflation can be a good thing. It’s a sign of an improving economy, and it means that your debts – providing that your income rises in line with or above the rate of inflation – will reduce over time in real terms.
We all know how inflation erodes the value of the pound in your pocket, which isn’t good, admittedly, but on the flip-side it works in your favour when it comes to your mortgage.
Quite simply, inflation at 2.7 per cent erodes mortgage debt much more quickly than if inflation were flat. Yesterday’s £100,000 loan becomes £97,300 in today’s money. And as long as your earnings also generally stay in line with inflation, given time you’ll end up paying off yesterday’s loan with tomorrow’s earnings.
Anyone who bought a house in the 1970s will know first-hand how the value of their mortgage debt has decreased in real terms as their wages have increased. So yes, even if the supermarket shop gets more expensive, there’s a silver lining.
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Dean Turner, economist at UBS Wealth Management, says NO.
Increasing inflation is rarely good news for consumers. If prices rise at a faster rate than incomes, households will be compelled to consume less. Households could possibly use other means, such as savings or borrowings, to maintain their level of consumption, but this option presents its own set of problems.
Another concern with rising prices is that, recently, the effects have been shared unevenly across the population. Inflation hits those with lower incomes disproportionately hard compared to the rest. Persistently high inflation could lead to higher inequality.
We don’t have to look that far back in time to see how higher inflation affects consumers. The drop in sterling following the EU referendum sent UK consumer prices soaring, causing households to dip into their savings to limit the impact. Given that this bout of inflation was thought to be temporary, it wasn’t a completely irrational reaction. But with savings depleted, the ability of households to withstand another period of high inflation will be limited. Consumption would likely fall.