A little inflation hasn't hurt anyone – that seems to be the mantra in Britain right now. And I can see the advantages – debt is eroded by increases in prices and, with the Bank of England stubbornly keeping interest rates at a record low and printing money, things can only get better. For some people, at least.
If you're a bank that was saved by the government from collapse, then the current policy of free money is really bliss. You can charge your customers relatively high interest rates for loans and make a killing on the margin – imagine getting money at around 1 percent (the current 1-year LIBOR rate for sterling) and lending it out at 11 percent for a 12-month personal loan.
At the same time your depositors pay you for the privilege of keeping their cash supposedly safer than under their own mattress – what with burglaries and riots, especially in London, plus mattresses aren't as solid as they used to be, people need to keep their money in a bank deposit nowadays. But I, for one, haven't come across one that pays a real positive interest rate.
Rates of interest of between 2.35 percent and 4 percent on tax-free Instant Savings Accounts (ISAs) are sold by banks as great deals for savers – but this month consumer price inflation came in at an annual rate of 5.2 percent. A nice deal for the bank, but what about savers?
The cautious are paying for the profligate, not only by sacrificing their tax money to save banks from collapse but by seeing their savings eroded by negative interest rates in an ever-inflationary environment and by paying more for goods and services year after year since the crisis started.
Monetary authorities and economists have warned that the savings ratio in Britain is worryingly low. According to World Bank data released last spring, gross savings are 12 percent of gross domestic product in the UK, the fifth-lowest ratio of savings in Europe, ahead only of Iceland at 11 percent, Portugal at 10 percent, Ireland at 9 percent and Greece at 3 percent.
On the Save Our Savers website, a user logged in under the nickname "Sick of being robbed" commented after news that CPI hit 5.2 percent this month: "Why not have a demo every month when the BoE meet to decide interest rates? Inflation now at 5.2 percent, it’s getting worse. Support for savers will surely grow."
Not only savers feel cheated by the easy money policy; pensioners are worse off as well. With energy bills soaring, food costs going through the roof and clothing prices increasing, life for Britain's retired population is getting harder and harder. Elderly people looking longingly at fruit or chocolates in supermarkets but leaving the supermarket with just a handful of staples in their bag are a common sight in much poorer Eastern Europe; but one sees them in every supermarket in London today as well, and many pensioners put off turning the heat on as much as they can to save on their energy bill.
Yes, inflation will erode the sovereign debt, and printing money may at some point stimulate growth. But inflation also kills predictability, which is essential for business, and in the long run stifles consumption and is a disaster for consumer confidence – look at results from Tesco and Sainsbury's not long ago.
And yes, those paying off their mortgages are having the time of their life now with interest rates so low, but this only prolongs the agony of an overpriced housing market, where getting on the property ladder has become impossible for a lot of young – and not so young – people. Buyers are getting fewer as they are priced out of the market and at some point house prices will have to adjust lower.
Far from being the solution to the UK's problems, inflation acts like make-up that only hides the economy's wrinkles. It's deep, reconstructive surgery that Britain needs, not just some powder and lipstick.