The Slow March of Inflation...
I went shopping this morning and noticed something that reminded me of inflation.
"Different pack size. Great regular price"
I knew straight away what it meant.
What used to be a 260g pack is now a 240g pack, but not to worry, it's the same regular price! Sounds like a good deal to me!
This is a real-world example of why you should invest in assets in addition to a cash savings account.
The problem, as I've detailed here and here, is that cash savings don't keep up with inflation.
A better way of looking at inflation is not that the prices of goods go up (they don't, unless supply of those goods is falling or demand for them is increasing), but that the value of the currency used to pay for them is going down.
This is what inflation really means. The value of the GBP has fallen by 90% since 1975 (using figures from Nationwide).
Let's keep it simple and say you put £1000 in a savings account in 1975 (about 6 months' annual earnings at the time).
Using the base rate + 1% as the average interest rate in bank over this period if time, that £1000 would turn into about £17,000.
Sounds OK, but that's not much more than 6 months' average annual earnings today...
So your cash has barely grown.
Had you put £1000 in the stock market instead, it would now be worth around £140,000. (Using the average nominal return of 9.4% over the past century and 2.8% average dividend).
That's about five times the UK average salary.
There's a post over on the PoundCounter Facebook page with some details of a decent index fund to help you do this.