The real impact of price inflation
The value of money has fallen by 94% over the past 50 years, illustrating the real impact of price inflation.
New research from BM Savings, using data from the Office for National Statistics (ONS), found that someone today would need £1,796 to have the equivalent purchasing power of £100 in 1960.
Put another way, £5.57 in 1960 would provide the same purchasing power as £100 today.
During the past fifty years, the real value of money was eroded by price inflation the fastest during the 1970s. Retail prices increased by an average of 13% a year during that decade.
More recently, during the 2000s, there has been an average inflation increase of 3% a year.
Even this relatively low level of price inflation has seen the value of money reduced significantly, with £131 needed today to have the same spending power as £100 in the year 2000.
If retail prices increase annually for the next 50 years in line with the Government inflation target of 2%, the value of money would decline by 63% during this time. Someone would need £269 in 2060 to have the same spending power as £100 today.
Price inflation is an important consideration for Financial Planning, with the need to make assumptions about future price inflation and decisions about how to invest to stand the best chance of keeping pace with inflation.
Savers today find themselves in a particularly challenging situation, with their money kept in cash guaranteed to be eroded by inflation in real terms.
The latest forecasts from economists suggest we will not see an interest rate rise until August at the earliest, so savers continue to have difficult choices to make about exposing some of their money to investment risk or accepting an erosion in purchasing power.
Photo credit: Flickr/Martin Bamford