Sean O'Grady: Falling inflation comes to rescue of savers

Share
Related Topics

If the Conservatives want to regain their reputation for economic competence, they will have to do better than this. David Cameron's claim that the "innocent victims" of "Gordon Brown's recession" include the nation's savers has some truth in it, but not enough to overcome the impression that the Tories are yet to grasp the magnitude of our economic problems. Long term, they may be right; but short term the last thing the economy needs is tax breaks to encourage more saving and less spending.

Yes, there is a squeeze on savers. Inflation was 4.1 per cent in November, the last figure available, and is probably closer to 3 per cent now – compare that with the 1.48 per cent available on instant access accounts and the 1.9 per cent on notice accounts. These figures, from Moneyfacts, are pre-tax, so the picture for most savers is even bleaker than it first appears.

But not for much longer. Inflation is plummeting. Prices – not just their rate of increase – will soon fall. The retail prices index will decline at an annual rate of close to 5 per cent, not seen since the early 1930s. The consumer price index, which doesn't take account of falling mortgage payments, will also turn negative, though less decisively. So even if you receive no interest on your savings, their purchasing power at the end of this summer will be greater than at the beginning. It won't feel that way, because monthly or annual interest cheques will be smaller, but savers will be winners from this recession.

Longer term, savers may lose a little; but recent times have hardly been a bonanza; the past five years have seen real returns on notice accounts average just 1.4 per cent a year. Real rates now may actually be higher than they were in September, when inflation peaked.

The Tory leader is thus suffering from what economists call "money illusion"; an inability to distinguish between the nominal and the real, inflation-adjusted, world. While this is a non-fatal illness, it often results in debilitating flakiness in stressful conditions, such as close proximity to fact.

The truth is that anyone wealthy enough to be living off the interest on a deposit account is likely to be a higher-rate ta payer, and thus ineligible for Mr Cameron's tax break. Basic rate taxpayers would hardly notice the difference. Meanwhile, Mr Cameron, more understandably, has nothing to offer on the more serious threat to savings – the one-third collapse in global share prices in a year, which has affected pensions catastrophically, and of course the sharp drop in house prices.

Much of the Tories' long-term thinking is sound. For example, Mr Cameron's national loan guarantee scheme will probably be what the Government ends up doing. But there is an immediate threat Mr Cameron seems unable to comprehend: that of a savage, uncontrollable deflation.Almost any risk is worth taking to avert that. As we saw in the 1930s, and in Japan more recently, once you're in such a slump no one can get you out of it – not even David Cameron.

React Now

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
iJobs Job Widget
iJobs General

Langley James : Desktop Support Analyst; 1st Line; Moorgate up to £23k

£20000 - £23000 per annum: Langley James : Desktop Support Analyst; 1st Line; ...

Recruitment Genius: Retail Sales Assistant

Negotiable: Recruitment Genius: This fragrance store are looking for enthusias...

Recruitment Genius: Project Manager

£35000 - £40000 per annum: Recruitment Genius: An exciting and rewarding role ...

Recruitment Genius: E-commerce Executive - UK / International

Negotiable: Recruitment Genius: You will be joining a long-established, renown...

Day In a Page

Read Next
 

Daily catch-up: Old London Bridge; how to fight UKIP; and wolves

John Rentoul
Muslim men pray at the East London Mosque  

Sadly, it needs to be said again: being a Muslim is not a crime

Yasmin Alibhai Brown
In a world of Saudi bullying, right-wing Israeli ministers and the twilight of Obama, Iran is looking like a possible policeman of the Gulf

Iran is shifting from pariah to possible future policeman of the Gulf

Robert Fisk on our crisis with Iran
The young are the new poor: A third of young people pushed into poverty

The young are the new poor

Sharp increase in the number of under-25s living in poverty
Greens on the march: ‘We could be on the edge of something very big’

Greens on the march

‘We could be on the edge of something very big’
Revealed: the case against Bill Cosby - through the stories of his accusers

Revealed: the case against Bill Cosby

Through the stories of his accusers
Why are words like 'mongol' and 'mongoloid' still bandied about as insults?

The Meaning of Mongol

Why are the words 'mongol' and 'mongoloid' still bandied about as insults?
Mau Mau uprising: Kenyans still waiting for justice join class action over Britain's role in the emergency

Kenyans still waiting for justice over Mau Mau uprising

Thousands join class action over Britain's role in the emergency
Isis in Iraq: The trauma of the last six months has overwhelmed the remaining Christians in the country

The last Christians in Iraq

After 2,000 years, a community will try anything – including pretending to convert to Islam – to avoid losing everything, says Patrick Cockburn
Black Friday: Helpful discounts for Christmas shoppers, or cynical marketing by desperate retailers?

Helpful discounts for Christmas shoppers, or cynical marketing by desperate retailers?

Britain braced for Black Friday
Bill Cosby's persona goes from America's dad to date-rape drugs

From America's dad to date-rape drugs

Stories of Bill Cosby's alleged sexual assaults may have circulated widely in Hollywood, but they came as a shock to fans, says Rupert Cornwell
Clare Balding: 'Women's sport is kicking off at last'

Clare Balding: 'Women's sport is kicking off at last'

As fans flock to see England women's Wembley debut against Germany, the TV presenter on an exciting 'sea change'
Oh come, all ye multi-faithful: The Christmas jumper is in fashion, but should you wear your religion on your sleeve?

Oh come, all ye multi-faithful

The Christmas jumper is in fashion, but should you wear your religion on your sleeve?
Dr Charles Heatley: The GP off to do battle in the war against Ebola

The GP off to do battle in the war against Ebola

Dr Charles Heatley on joining the NHS volunteers' team bound for Sierra Leone
Flogging vlogging: First video bloggers conquered YouTube. Now they want us to buy their books

Flogging vlogging

First video bloggers conquered YouTube. Now they want us to buy their books
Saturday Night Live vs The Daily Show: US channels wage comedy star wars

Saturday Night Live vs The Daily Show

US channels wage comedy star wars
When is a wine made in Piedmont not a Piemonte wine? When EU rules make Italian vineyards invisible

When is a wine made in Piedmont not a Piemonte wine?

When EU rules make Italian vineyards invisible