What are the pros and cons of inflation?
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Pros: your debts reduce in real terms. If you earn £3,000 a year and have a mortgage for £9,000 that’s a lot of debt that’s going to take you 25 years to pay off. But ten years of wage inflation and now you earn £9,000 a year but your mortgage is still only £8,000 (you’ve paid some off in those ten years). Now you can pay it off easily.
Cons: Your savings fall in value. You have £9000 in the bank earning you 5% interest – so each year you get £450 – which is enough to buy you a nice holiday. Now you get inflation at 10% and while you are still getting £450 each year, that holiday now costs £500, £550, £605 over the next three years.
Basically, if wages keep roughly in line with inflation, then inflation is good for poor people with debts and very bad for rich people with savings.
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