The Threat of Inflation - Do You Fully Understand What It Can Do?
While all of us will have come across the term “inflation†on many occasions, how many of us actually realise what kind of effect it can have on our lives, our savings, and our spare cash?
The UK Inflation figure has long been associated with what is called the Retail Price Index (RPI), which is basically an index which tracks the cost of an “average†basket of goods to see how prices are changing.Â
The RPI is tracked on a monthly basis, having initially started in January 1987 and while Governments have tried to quote revised figures, taking out certain elements which do not agree with their conclusions, the constituents of the basic RPI have remained fairly static.
It may prove interesting to illustrate how the cost of living (which is effectively what the RPI tracks) has changed over the last 10 and 20 years. The results are listed below, and may be surprising to many :-
Last 20 years
If we base our figures on January 2007 and January 1987 (the date the index was initiated), the figures are as follows :-
January 1987 - RPI figure 100.00
January 2007 - RPI figure 201.60
Result - The cost of living has increased by ((201.6-100)/100)*100 = 101.6%
Conclusion :-
In order for a pound in January 1987 to buy the same basket of goods in January 2007, it would have had to increase by 101.6%. This means that you would need £2.01 to buy the same goods in Janaury 2007, that you could buy for £1 in January 1987.
Last 10 years
If we base our figures on January 2007 and January 1997, the figures are as follows :-
January 1997 - RPI figure 154.4
January 2007 - RPI figure 201.60
Result - The cost of living has increased by ((201.6-154.4)/154.4)*100 = 30.5%
Conclusion :-
In order for a pound in January 1997 to buy the same basket of goods in January 2007, it would have had to increase by 30.5%. This means that you would need £1.305 to buy the same goods in Janaury 2007, that you could buy for £1 in January 1997.
Have your salary increases kept pace with inflation over the years?
While inflation is required to enable an economy to grow, it can wreck the value of money if it gets out of control. This perfectly demonstrates the power of inflation, and why the Government are so determined to control it.
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