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News - 7 November 2011

Inflation who benefits and who doesnít?

We asked our own Stuart Coleman what his thoughts are on this question: this is what he thought.

You may ask if anyone benefits in a time of record high energy prices, soaring insurance premiums, pricey petrol and (perhaps less importantly) expensive alcohol?

A positive aspect of levels of inflation is hard to see. But it is still there. Even when the consumer price index (CPI) is at the highest rate since September 2008 (inflation is at 5.2%).

I see four areas where a level of inflation like this can produce winners.

State pensioners: September’s CPI inflation figures are used to set the State Pension level for the following year. High September figures mean high pension increases.
So come April 2012, the State Pension should rise by 5.2%, in line with last month’s CPI inflation figure. This will increase the full entitlement State Pension by £5.31 to £107.46 a week. The joint state pension will rise by £8.49 to £171.84.

Benefits claimants: also linked to September’s CPI inflation figures are Jobseekers’ Allowance, disability benefits, income support, incapacity benefit, maternity benefits, child benefit and working tax credit.
So if the government does decide to stick with the CPI-benefit link, Jobseeker’s Allowance should rise by £3.51 to £71.01 a week from April 2012.

But again, as with pensioners, other rising costs will almost certainly cancel out this gain. See below.

Inflation-linked savers: If you are lucky enough to have your nest-egg stashed away in an inflation-linked bond, you’ll have only seen your rate rising over the last few months.
Some lucky investors have these tax-free accounts paid 0.5% percentage points over the retail price index (RPI) measure of inflation, currently 5.6%. Meaning that if you’re currently holding one, you’ll be earning the equivalent of 6.1% on your savings (the actual interest rates are calculated differently but ultimately add up to RPI plus 0.5% over the account term). On a similar note, the annual allowance for tax-free ISA accounts is also linked to CPI inflation. So next year it will increase from £10,680 to £11,280.

Borrowers: Inflation generally reduces the value of debt. In fact, with CPI at 5.2%, debt effectively halves in 12 years. However this is dependent on incomes rising. And for many, they’re not.
But if your name is George Osborne, the largest borrower of all of us (current UK national debt of over £900 billion) inflation is helping to reduce the “Real-term” value of the debt.

However, there are also some losers.

All of us. We all spend, prices for every day goods go up, we as consumers pay more. Inflation is primarily being pushed up by energy cost increases and price rises for basic goods such as food.

Low income households they spend a greater percentage of their income on these basic goods and hence are hit harder when their prices increase.

Pensioners and benefit claimants are included in this category. Research from Alliance Trust shows that 65-74 year-olds are actually facing an inflation rate of 6.1% - driven by gas and electricity price rises.

In the 2010 emergency budget George Osborne announced that public sector pensions and other benefits would be linked to the CPI measure of inflation, rather than the retail price index (RPI).

By this switch, the Government is saving thousands from pensioners and benefit claimants as the CPI figure is generally lower than the RPI, and thus, payments will rise at a slower rate.

Savers: Inflation hits savers especially hard. This is because rising prices slash the real-term spending power of any money not earning an equivalent level of interest. And unfortunately, there are few savings accounts around at the moment with an interest rate equaling inflation. What’s worse, those that are around will require you to lock away your savings for a long period of time.

Divorcees: Courts often order that maintenance payments in divorce cases increase in line with inflation. Fair enough if you’re the payee, as rising prices will be taking their toll on you as well. Not so good if you’re the payer though.

Mixed news indeed.

Stuart Coleman, Tax Manager of ABDS.


If you need any help and advice for your business or financial planning don’t hesitate, contact Lavinia Newman, Stuart Coleman or Tonmoy Kumar to discuss how ABDS can help.

ABDS Chartered Certified Accountants of Southampton.
Tel: 023 8083 6900  E-mail: abds@netaccountants.net

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