Inflation rises

CPI annual inflation – the Government’s target measure – was 3.7% in April, up from 3.4% in March.  The largest factors to the change in the CPI annual rate between March and April came from the rise in prices for clothing and footwear, food and non-alcoholic beverages and alcoholic beverages and tobacco.

Is it a good thing, or a bad thing?

Certainly, not everyone is concerned about the recent rise.  Some homeowners are even welcoming it thinking that it will lower the value of their debt and lessen the burden on them in the future.

This could be a mistake.  It is true that in theory, inflation may erode the real value of the debt.  However, it can’t reduce the monthly burden of the debt unless wages are rising too, and they are not.  We know that the government is planning a freeze on all public sector salaries above £100,000, but it isn’t just the very well paid who are likely to see their nominal wages stay still and their real wages fall.

Retail Price Index

The retail price index may be rising at over 5% a year, but it is not likely that the tax-paying public will agree to a nominal wage rise of 5%+ for any public sector workers.  That suggests that real wages for the millions of people who are dependant on public sector money are on the way down.

It’s the same for the private sector.  Unemployment is high and rising and there is little or no pressure on companies to offer higher wages than they already are.  Statistics show that real wages in the private sector are also coming down.

What is inflation actually doing for those people with debt?  Their cost of living has risen (via rising oil and food prices), thus leaving less money for interest and debt payments.  So, the higher it goes the more of a burden the debt becomes – not the other way round.

It might work the other way for small business owners if they can raise prices whilst keeping real wages down.

If you have debt, via your mortgage and credit cards, please don’t think that today’s inflation rate might be good for you  as it probably won’t be!  Contact an experienced independent financial planner if you think you need help and financial advice.