We all know that inflation erodes the purchasing of one’s money over time and that compounding of even seemingly small rates of inflation can have a big impact over many years.
Here are a few numbers…
The UK inflation rate has just hit an annual rate of 3.2%. That’s up from 2% in July. It’s the biggest monthly increase since the ONS began measuring inflation in this way (i.e. using the Consumer Prices Index – CPI) in 1997.
But that is only one aspect. The chart below tracks (broadly) the hike in prices across a range of goods and services since 1970 (Source: MoneyWeek).
Wages over the same period have broadly risen by 20x. House prices have gone up more than 65X over the same period. If wages had gone up by as much as house prices over the period, the average salary would be around £95,000.
Cheap debt has (at least) in part fuelled this rise in prices…think house prices and “top-end” motors. House prices have also been pushed northwards by a limited supply.
If you consider other items such as a washing machine, these are not financed (typically) by debt and hence we see a lower multiple. Globalisation and the deflationary pressure on labour costs may also have an impact.
Inflation is of course, the enemy of the saver, particularly one who is risk averse and who sees investing in the stockmarket as akin to gambling.
The following statistics are taken from a video from Dimensional Fund Advisors (DFA) entitled the Impact of Inflation; although the DFA stats refer to the US, the same principles apply here in the UK:
In order to have kept up with inflation, an investment of $1 in the S&P 500 Index in 1926 would have needed to have been worth $14 by the end of 2017. By 2017 that investment was actually worth an incredible $533!
The same investment in One Month US Treasury Bills (a proxy for cash) would have only been worth $1.51 by the end of 2017, representing a significant reduction in purchasing power over the period.
Investments in stocks and shares might suffer from volatility from time to time (perceived risk) but over the long haul, they have proven to a be more than effective hedge against inflation. Surely the real risk comes from being too cautious and watching inflation chip away at one’s wealth in real terms, as the years roll by.
I hope you found the above of interest but please do not hesitate to contact me if you have any concerns or questions relating to anything in this e-mail or indeed any other finance related matter.
Yours sincerely,
Graham Ponting CFP Chartered MCSI
Managing Partner
