Price stability in an economy is healthy. It gives confidence to people and businesses to save and invest. The Bank of England is charged with the responsibility of maintaining price stability - in other words controlling inflation.
Modest levels of inflation coupled with increased wages do not cause a great problem to the working population, but people on fixed incomes certainly lose out. If you are a saver, the true value of your nest egg reduces. But it is not all doom and gloom if you are a borrower as in real terms your loan is shrinking.
In the UK we have experienced high levels of inflation - around 25 per cent per annum just after WWI and again in the mid-seventies. Those sort of rates can cause real hardship, not only to consumers but also to businesses.
Relatively speaking, we are not a nation of savers, so in 2016 in the UK we saved less than 13 per cent of GDP (Gross Domestic Product – the total value of the goods and services we produce) compared to Germany where they save 27 per cent. It could be something in our genes or culture, or in the case of Germany perhaps the memory of hyperinflation remains as a stark reminder.
In January 1920 it experienced a monthly inflation rate peak of 56.9 per cent. Imagine seeing your life savings evaporate to nothing – or much better, paying off your mortgage with a few months’ pay! But it wasn’t a joking matter.
Between 1919 and 1923 the German mark reduced to one trillionth of its original value. All confidence in paper money was lost and farmers would not accept it in payment. That resulted in empty shelves, starvation and civil unrest. In 1946 in Hungary, at its peak prices doubled every 15 hours.
Such conditions result in economic chaos. Paper money and coins are abandoned, people resort to bartering and “invest” any wealth they have in anything they consider will retain value. It takes many years to recover.
In the UK, the government has set a target of 2 per centannual inflation. Stable prices lead to confidence in the currency and encourage investment and saving. But you do not have to have hyperinflation to suffer from financial problems either as a consumer or business owner. If you are struggling with money speak to an insolvency practitioner to help turnaround your situation.
This column is brought to you in association with Phil Meekin, Head of Marketing for Wilson Field.