Citywire for Financial Professionals
Stay connected:

View the article online at

Inflation: a stealth tax to torture savers

First time buyers are losing all hope as houses remain unaffordable and low interest rates plus high inflation makes saving for a deposit impossible.

Inflation: a stealth tax to torture savers

It’s a full four years since the property market peaked. A credit crunch and a debt crisis were meant to have shone a flashlight on a market caught with its pants down: not the faithful, reliable lover we’d taken for granted, but something doing the dirty on us all along.

And yet even the details of unsafe lending and artificially inflated prices weren’t enough to precipitate a proper 'correction'. Houses remain, by most measures, unaffordable.

First time buyers are losing all hope

According to new figures from the Post Office, 53% of potential first-time buyers have lost all faith in their ability to ever buy a home. Among the optimist minority, 35 is the age at which they think they’ll be financially prepared to invest. Back in the 1960s, if you were the house-buying type then you expected to be greeted by an amiable bank manager when you were 23, your house following not too long after your first pair of winkle-pickers.

So what are the powers-that-be doing to help? Interest rates have remained low, certainly, but that hasn’t done much to help savers trying to put together a deposit. And the associated higher inflation is making it harder to save in the first place. There’s the government’s FirstBuy scheme, targeting an underwhelming 10,000 buyers and flawed from the outset by its cozy relationship with the developers (the Wolf, not the Grandma, as far as first-time buyers are concerned).

But as the Monetary Policy Committee consistently fails to tackle inflation, turning a blind eye to an overshot target in 26 of the last 40 months, you’d be forgiven for wondering whether this lack of attention isn’t so flagrant that it has to be a plan in disguise. What if inflation isn’t a mistake, but a policy?

If so, it’s a cruel one. The combination of low interest rates and high inflation means slow torture for savers, who get to see their cash diminishing in terms of both reward and spending power.

Inflation as a policy

Behind the scenes and from a government perspective, the country, however, might not do so badly. During periods of high inflation, the substantial compound interest losses suffered by savers become very real gains when trying to reduce a national debt burden. In simple terms, the size of the debt is – behind the scenes – diminishing all the time, taking a few sharp edges off the cuts and working, to a degree, like a stealth tax.

It’s been done before, but it works better in some environments than others and remains far from uncontentious. Falling living standards, associated with inflation, can impact government debt by increasing the welfare spend. Gilts linked to inflation will need to be serviced at a higher level, but taxes on lagging earnings won’t provide the shortfall. And yet there are cleverer commentators than me who seem to have fallen in love with the idea of suffering sterling.

Extreme caution is advised, however, when attempting to apply the theory to individual borrowers. The only time inflation helps pay off a mortgage is when earnings are keeping pace with prices. They’re not.

Fingers crossed for the future

Except… first-time buyers might, in the medium to long term, welcome inflation.

It’s another indication of just how sick the UK property market is that what was once considered a safe hedge against inflation is currently (depending on your choice of index) underperforming by around 15%. According to the National Institute of Economic and Social Research, it’s a trend that will continue for some time, knocking a further 10% off house prices over the next five years. Nominal values, as reported by the leading house price indices, will remain fairly static, perhaps even rise a little; but this could turn out to be an inflation-led correction.

The message to determined first-time buyers is: continue to save for a deposit – even if returns on savings accounts are hard to get excited about – because a deposit isn’t something that can be created in a hurry. And hope that rising earnings in around five years’ time will combine with stalled prices to create a significantly healthier buying environment.

10 comments so far. Why not have your say?

Ian Phillips

Aug 25, 2011 at 13:00

" Back in the 1960s, if you were the house-buying type then you expected to be greeted by an amiable bank manager when you were 23, your house following not too long after your first pair of winkle-pickers."

Yeh right! you of course were there in those easy times?!

Well I was, my mortgage was obtained by trudging the streets and knocking on doors until eventually a Building Society clerk made an error in his calculations and Yippee I got one of those "easy" was a joint mortgage and equated to FIVE times my annual salary and the variable interest rate was (if I remember) around 7%. Our hard saved deposit was equal to 8 months salary.....

Stop whinging about how hard things are don't know the half of it !!

report this

Dr Jimbo

Aug 25, 2011 at 13:06

Build costs for a normal house currently stand at about £1300 per square metre. To save costs the industry has been building tiny houses for many years now - some so small that a king sized bed could not even be fitted in the "master" bedroom. A reasonable living space would be 100 sq metres so the base cost is £130,000. But many new houses are less than 70 sq m.

Unfortunately our building methods are also absurdly slow and expensive and have not reflected the benefits of mechanisation seen over the last hundred years or so. The physical materials used may have improved and in some areas there is good value - bathroom fittings for example. But we have a slow, trade-based construction process and designs still rely on the wet trades and block-on-block methods. This needs changing dramatically so complete buildings can be designed, prefabricated and delivered to site for assembly within a few weeks. To do this we need to move away from traditional building methods and turn to composite materials and cad-cam design to provide much more bespoke design at low cost. It means we have to use lightweight materials and more timber panelling. Our aim should be to halve the construction cost within 5 years and to do this we have to tell the planners to stop being such reactionary idiots over requirements for brick facings, refusing plastic windows, placing solar roof panels on frontages etc .

Even if we succeeded in this, however, the killer is the land cost. This also needs to be addressed to enable far more land to be released or compulsorily purchased for building - but not at £1m per acre - at a tenth of that.

Houses prices must fall dramatically soon or we will have a generation of homeless people. Its about time the goverment took this problem on board. It could make a start by stopping further immigration, by introducing laws to prevent slum landlords getting away with profiteering on appalling property and by requiring the Crown Estates to sell land at low prices to self-builders who will use new construction methods and energy-saving materials.

report this

David Evershed

Aug 25, 2011 at 15:18

House price inflation is likely to be zero or negative over the next year or two and is not the issue.

The problem with housing is that land is half the price because building land is so scarce.

The solution for first time or subsequent time buyers is for a change in planning regulations to allow more houses to be built. The proposed 'localism' legislation is going to make it harder not easier to get planning approval.

report this


Aug 25, 2011 at 15:21

Absolutely right Ian Phillips,

We had a Hell of a job getting our first mortgage back in 1969 and if I remember rightly cost us half our salaries in monthly payments.

Back in those days kids left home in their teens or early 20's if at university, and got of their arses and bought a property. My first house cost me 3,500 pounds.

Nowadays all kids seem to want is everything all at once and not save up, so they end up living with Mummy and Daddy well into their thirties and then winge about not being able to afford a property of their own.

My six brothers and sisters were all booted out of my parents house by the time we were legally able to vote.

report this


Aug 25, 2011 at 21:27

'But as the Monetary Policy Committee consistently fails to tackle inflation . . . '

What they are doing stinks. People have had enough of rotten regimes.

report this


Aug 26, 2011 at 11:26

Inflation is not a stealth tax, it's theft!

It's taking money for people who have saved for a rainy day on the premise that if they haven't spent it they don't need it and we do.

They don't have the guts to put up taxes so they steal it via inflation.

report this

Jack Porter

Aug 27, 2011 at 09:32

The Chancellor is well aware that hitting savers is an eays way to provide the wherewithall for Borrowers to get through the recession. What we would like to know is what does he have up to sleeve to give us ome relief from the effects of the inflation which Governments have manged to burden us with. I got a very nice 3.5% on a 2 year fixed deposit. I can only assumme that the flood of liquidity allows banks to ignore inflation?

Waht's new. As soon as we earn money at work we should spend it - at least we would have had that doubtful pleasure.

report this

John Pringle

Aug 27, 2011 at 15:38

Interesting what Dr Jimbo says about construction methods in this country which seems apparent when you look at other countries abroad. It would help to bring prices down to a more affordable level.

As for inflation, the government still seems unconcerned as it suits them at the moment, the problems could lie in the not too distant future though.

report this

Robert Court

Aug 28, 2011 at 10:39

Expect double digit inflation soon - and throughout most (if not all) of the western economies.

You can't print money (without wealth having been created first) without inflation building up; it's impossible.

Goverments are going to have to find the easy option to get rid of their huge debts - and the easy option is to reduce that debt in real terms by allowing inflation to flourish unabated.

Unfortunately, it's as simple as that! :(

report this

Myron Martin

Aug 28, 2011 at 15:42

Congratulations to the author, this essay has just proven that the current banking system is corrupt and WAS designed to do exactly what it has done, given an ILLUSION of prosperity while stealing the savings of workers.

Quote: "What if inflation isn’t a mistake, but a policy?" Indeed it is, it was "baked in the cake" when the Federal Reserve Act was enacted in the U.S. in 1913 removing money creation and regulation from the people's representatives to private bankers. This "mother of all Ponzi schemes" has allowed a few elites to benefit from the labour of millions and has now become entrenched in all the countries of the world employing a fractional reserve Central banking system.

Quote: "The only time inflation helps pay off a mortgage is when earnings are keeping pace with prices. They’re not." Exactly right, and WHY? Because the fiat currency system is a recipe for perpetual debt. Since ONLY the principal of a loan is ever created, it necessarily follows mathematically that the only way interest can be paid is if there are an exponentially increasing number of NEW and BIGGER loans being contracted to BORROW our currency supply into existence, all the while INTEREST accumulates as DEBT, which just keeps getting rolled over so no final settlement is possible.

If you doubt that, consider the honest sworn testimony of a Canadian Central Banker from 1939 before Parliament; Graham Towers then Bank of Canada Governor stated quite accurately that "every bank loan is a new creation of money, and when it is paid back it ceases to exist" and when you understand that in its deepest implications, then the "financial mess" the whole world, but particularly Europe and the U.S. where the system has been entrenched the longest, ceases to be a mystery.

It is all simple mathematics, cleverly designed to enslave the world for the benefit of an elite few banking families.

report this

leave a comment

Please sign in here or register here to comment. It is free to register and only takes a minute or two.

News sponsored by:

The Citywire Guide to Investment Trusts

In this guide to investment trusts, produced in association with Aberdeen Asset Management, we spoke to many of the leading experts in the field to find out more.

Watch Now

Today's articles

Tools from Citywire Money

From the Forums

+ Start a new discussion

Weekly email from The Lolly

Get simple, easy ways to make more from your money. Just enter your email address below

An error occured while subscribing your email. Please try again later.

Thank you for registering for your weekly newsletter from The Lolly.

Keep an eye out for us in your inbox, and please add to your safe senders list so we don't get junked.

Sorry, this link is not
quite ready yet