Inflation is down to zero. We are led to believe it is good news for all of us all but anyone who shops for food or even petrol regularly will know that we need to unpick that. Our supermarket bills are not coming down – whatever they claim – and the petrol costs are already on the way up again.
And ‘zero’ has become something of a dirty word with zero hours contracts that give workers uncertain low-paid work, zero % credit cards that can cost us a lot more in the long run and zero calorie drinks that still make us fat.
So, zero inflation good or bad?
And what is ‘zero’ anyway? The government now uses the Consumer Price Index (CPI) as its preferred measure of inflation and that records inflation at 0%. But according to the Retail Price Index (RPI), which has only recently fallen out of favour in official circles, inflation is at 1%. RPI is still in use by some government departments. Government and economists have a range of other indices to play with as well.
CPI v RPI
CPI and RPI measure a similar range of items that we buy regularly but CPI does not include housing costs, such as mortgage interest or council tax. In addition, CPI has a different way of calculating things. If an item rises in price the CPI calculation assumes that shoppers will opt for a cheaper item instead and the index is reduced accordingly. It’s not quite like opting for a bottle of cheaper supermarket cava when you find that your favorite prosecco has gone up in price but it does not compare like with like each month.
And we must be wary because when interest rates start to increase the increase in mortgage rates will not be recorded in the CPI.
Why choose one over the other?
Forgive us if we sound a little cynical but there is more than a whiff of manipulation when it comes to what index is used to calculate what. RPI is often used by the Government to calculate what we’ll ‘pay’, such as train fare increases, or student loans interest. CPI – the lower measure – is now used for most things when we are on the receiving end, that is, where we get the benefit (except for National Savings).
Back in the seventies inflation reached 25%+ and public sector pensioners did very well, as did borrowers. People took out big home loans and within a year or so the loan did not seem so big. Wages rose, so these mega-mortgages were soon down to three times earnings and manageable.
Zero inflation bad?
With zero inflation the loans stay just as big and for many wages do not rise, especially for those in unskilled work. And when interest rates do finally begin to rise the impact on people who have borrowed to the hilt will be immense. Any increase in their property value cannot be realised without taking out an even larger loan for their next step on the property ladder and their stunted wages and the Mortgage Market Review (which resulted in a much tougher stance by lenders on personal creditworthiness) makes the move less likely.
And for those with money in savings zero per cent interest is not good news either, as it means they will continue to get a very meagre return on their savings. The biggest savers tend to be the over 60s, and they have a different unmeasured level of inflation because they are not buying lots of petrol, new clothes or computers. Their income from savings has fallen and they are not going to be tempted to spend.
So, in our humble opinion, the only winners from zero inflation are government ministers and Bank of England who are taking credit for bringing prices under control when it has little or nothing to do with them.