plonkee money an english-er's thoughts on personal finance

May 23, 2007

understanding of inflation rising?

Filed under: savings — plonkee @ 5:22 pm

According to an article in the Independent people have a greater understanding of inflation than they used to and so invest in ‘inflation beating’ savings from NS&I. Well that is good news, although I’m a little shocked at a couple of things in the article. Firstly that in the summer of 1975, inflation was running at 25%, and secondly that people who were around then might not have truly understood the power of inflation until more recently.

If people really were understanding inflation more, then who are using the savings accounts with the paltry levels of interest? Allegedly nearly half of all savings accounts on offer have interest rates below 3.5% – the amount needed to break even with inflation once tax is taken into account.

I think you need to take this figure with a pinch of salt. After all, this is measuring people’s savings understanding by the number of products offered to them, rather than by the amount of money saved within them. Hopefully, more money is saved in the better half of accounts than in the worse half.

From the point of view of mis-understanding inflation and compounding interest, I think that some of the worst products around are the guaranteed return bonds. I have no idea whether they are good products in themselves, but they a lot of them are marketed on their guaranteed return, as if its a really high return.

For example the Lloyds TSB Guaranteed Investment Account has a strap line of Enjoy a 15% guaranteed return with no risk to your original investment. Thats 15% over 5 years or as stated in the literature, 2.85% AER, which is barely covering inflation. To me, that’s a real risk.

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