Inflation is defined as the rate of which the price of goods and services increase.
If you were to imagine the cost for a can of drink at the vending machine, petrol at the pump, housing or bread, the prices would have been much lower when you were growing up than they are now. That’s inflation in action.
If our wages don’t keep up with inflation, then our money doesn’t go as far and the standard of living falls.
So what is the current inflation rate? As of January 2021, the government quotes it at 0.7%. Compared to the 1970s where there was rampant inflation, this figure is historically low. Losing 0.7% of the value of your cash savings each year is a minor nuisance at best, and if your interest rate in your savings account matches that, then you wouldn’t be losing any value in your money in real terms at all. But there’s a twist in the tale.
What if the government’s figure of 0.7% didn’t actually match up to what’s really going on with prices in the country? What if real inflation was closer to 10%? After all, the US and UK governments have been inventing trillions of dollars of money in recent times in a process called quantitative easing, which is known to cause inflation.
In 1996, governments in the USA and UK decided to change the way that inflation rates would be calculated. They now use certain tricks such as substitution (using the price of the cheapest available type of product in the category they are calculating), geometric weighting (if they find something that has gone up a lot in price such as healthcare or property, they will assign an inappropriately low percentage of the calculation), and hedonic adjustment (reducing the price of an item like televisions because the item is higher quality than it was the year before). Hidden inflation is becoming more common too, such as when companies give you less of a product like Dairy Milk or Walker’s crisps for the same price, hoping that you won’t notice.
Even if you don’t understand this last paragraph fully, it basically means that the government is tweaking around figures in a formula to get a desired result, instead of doing it fairly. But why would they want inflation rates to seem lower than they actually are?
Firstly, because GDP numbers are inflation-adjusted. If governments are adjusting for inflation by their own fake figures instead of the real ones, it makes it look like the economy is growing even if the economies are actually going backwards. Put another way, because real inflation is at least 7% higher than quoted, it means that if the stock market isn’t growing at least 7% per year, people who invest into it aren’t actually profiting at all in real terms.
Additionally, governments want to quote low inflation rates so they can get away with meagre pay rises like the 1% it is giving NHS workers across the country. The news was not taken lightly after over a year of NHS workers being stretched to the limits during the COVID-19 pandemic. But, imagine if the government had given the 1% pay rise and then broke the news, “Oh, by the way, inflation is actually at 8%, not 0.7%.” The government would have basically rewarded the NHS workers by reducing their spending power by over 7%. The funny thing is that this is the reality.
It’s in the government’s best interests to keep the inflation rates lower than they really are – it makes them look better, and keeps the public from realizing that their standard of living may be dropping.
So, what if you’re reading this and you have excess cash that is sitting in a checking or savings account? You obviously won’t want the value of it to go down by 10% each year. Andrew Craig, the author of How to Own the World suggests to find a way to ‘own’ inflation. This means to buy things that we know are going up in price along with inflation – property, gold, commodities and shares.
Thought Canvas 