February 2007 If you own hard assets such as property or Gold then inflation, although not welcome, is not so much of a problem because these assets will usually increase in value as inflation rises. Right now we estimate UK inflation to be running at a minimum of 6% although any government will always fudge this number down. Out inflation figure translates that if you have £100 cash in your pocket today it will only have the purchasing power of £94 in a year’s time. But if you have £100 in hard assets today and inflation continues to run at 6% the value of your assets should be worth around £106. OK, this is a simplistic view but whatever the case nobody can argue that inflation is the grim reaper for savers who hold cash.

Hyper Inflation – Pre War Germany

On an interesting side point hyper inflation is where inflation gets truly out of control. This has happened in many South American countries over the years but the most famous example is Germany during the 1920’s when a loaf of bread in 1920 cost 2 Marks but by June 1923 the price had risen to 430,000,000,000 or 430 billion Marks! Therefore anybody who was cash rich in Germany in 1920 (that didn’t take action) was ruined over the next few years as their cash became worthless.

Hyper Inflation Tip

If hyper inflation ever gets hold in the UK (highly unlikely but still possible) and you find yourself in a pub with a few friends always offer to buy the first round of drinks. The reason is simple - hyper inflation causes prices to rise so fast and so quickly that the second round of drinks will normally cost double the first!

How Savers Can Protect Their Cash

One of the best and easiest ways that savers can shield their cash from being eroded by inflation is to consider buying National Savings & Investments (NS&I) Index Linked Certificates. According to the government’s Retail Price Index (RPI) for December 2006 inflation was running at 4.4% up from 3.9% in November. That by the way is a massive month on month move.

• The NS&I Index Linked Certificates pay tax-free returns linked to the RPI over 3 or 5 years
• For example, the 3 year certificate pays RPI 1.5% and to earn the same interest rate via a traditional savings account the rate for a higher tax-payer would need to be 9.25% and 6.93% for a basic rate tax-payer
• The 5 year Certificates pay 1.1% above the RPI which is equivalent to 9.16% for higher rate tax-payers and 6.87% for basic rate tax-payers
• Maximum deposit allowed into each separate issue is £15,000, minimum £100