For pensioners and those approaching retirement, inflation is usually seen as the enemy, eating away at savings, slashing the buying power of income, and generally making long-term planning very difficult. The effects of hyperinflation can be embedded in a country's psyche for several generations, as is the case in Germany and many emerging markets; those living in Venezuela today will live to tell their horrible tale.
Finance directors of heavily indebted but successful corporations will welcome inflation because it shrinks the value of debt. One million pounds borrowed today will end up looking like loose change after years of high inflation. We have seen this at its most extreme in Zimbabwe, where the note with the biggest denomination was for 100 trillion local dollars - making government debt equally worthless.
One must not forget that interest rates are linked to inflation, giving savers a real rate of return when these are higher than the rise in retail prices. What this spread should be is hotly debated, and should be seen not only as an absolute but also as a relative. Conventional wisdom says a real return of around 2 per cent is the norm, for example if RPI is running at 3 per cent Bank Rate should be 5 per cent per year (when price rises accelerate this spread will widen). Data from the Bank of England show this to be only very roughly the case, real rates ballooning beyond 10 per cent in the early 1920s to a negative 15 per cent during the 1970s inflationary spike. Even more interesting was that during the century beginning 1815 rates on Consols held between 2.5 and 3.5 per cent; low rates for a lot longer?
Likewise inflation itself varies tremendously every year in Britain. Generally hovering above 2 per cent in the postwar years, it surged to an annualised 35 per cent during the Napoleonic wars and then imploded to minus 25 per cent following Wellington's victory. So, too, absolute levels of government debt, currently over 80 per cent of GDP but nearly 250 per cent during the second world war.
Because some government obligations, state pensions and benefits mainly, are linked to inflation, it is in the government's interest to report the numbers low. Argentina took this to extremes during the Kirchner years, but the UK's switch from the RPI to CPI shaved a chunk off spending. Chancellor Osborne failed to do the same with index-linked gilts, learning the hard way how the bond market thinks.
House prices, the value of shares, shopping, holidays are things all of us are used to seeing through an inflation-adjusted lens. Charts of nationwide absolute house prices and the FTSE All-Share index have been divided by the annualised RPI. To that we then ought to adjust for changes in the value of the currency where you can see that the pound is close to its weakest trade-weighted level in decades. Cheaper than you might think.
