Prudence is an attitude that keeps life safe, but does not always make it happy
Zero inflation. Wow.
For someone who grew up in the 1970s and whose knowledge of post-war German economics consists of images of people pushing round wheelbarrows full of marks, that’s quite something.
I mean, it’s a good thing, right? Prices aren’t rising so that must mean we can all afford more things, more often.
Well, yes. And no.
Inflation means that whatever your daily bread cost yesterday, it will cost more tomorrow. This is OK, as long as what you are earning keeps pace with the rate at which things are going up. Ah.
Wages for normal people have been on zero inflation since the start of the recession. For most of us, what we can actually buy with the money we take home is less than we once could. If your take-home pay isn’t going up, then no matter how small the increase in your daily cost of living then you are still worse off.
Rampant inflation plays merry hell with anyone’s savings. Put away a bit each month for the proverbial rainy day and you’re likely to find that the end result won’t buy you as much as you thought it would – you might have to buy a smaller umbrella than you planned.
However, very low or zero inflation is also affects interest rates. Zero inflation pretty much means there’s no need to raise interest rates. And that, if you have savings, it’s a pretty disastrous effect. For all the talk about low interest rates and mortgage affordability, there are hundreds of thousands of people out there whose savings are doing nothing.
George Osborne’s efforts to help last week by removing the tax liability on up to £1,000 of interest on savings is fine on paper, until you look at what the savings actually amount to. If you have £10,000 in the building society (chance would be a fine thing!), you’ll be saving £50, assuming you pay tax at 20% and can find an account paying a generous these days 2.5%. Whoop. De. Do.
Obviously, it all helps, but £50 here and there isn’t going to help you onto that housing ladder. If you can manage to amass that ten grand it’s is a start, clearly, but it won’t go very far if you’re a first time buyer, with or without the Help to Buy ISA launched last week.
Median income in this country is £32,000. The minimum income you need in order to be a first-time buyer is something like £34,000 and that’s without the typical £30,000 deposit. A columnist in the Guardian the other day pointed out that, price-adjusted, this is 10 times what it was a generation ago. It’s more than half what I spent on my first house.
I wrote about housing affordability in my last blog and I’m repeating the topic a) because it’s too damn important not to and b) because of an interesting comment I had on the last one.
My esteemed counterpart across the pond – Craig Webb, Editor-in-Chief of ProSales (the BMJ equivalent title) – pointed out that the States, too, have issues with affordability of property for young people. Saddled with university and college debt from the get-go, US college graduates and those starting out also struggle to make that first step in the same way their UK counterparts do.
Those of us old enough to have been educated via Government grant, and who left university with only a £400 overdraft, sometimes forget how much easier we had it, even if it didn’t feel like it at the time.
We’ve had student loans in the UK for some years now, but they’ve only had to cover tuition fees recently. From the sounds of things in the US, we aren’t going to be solving our affordability problems anytime soon.