It is commonly believed that a high rate of inflation is a bad thing for families’ finances: gas and grocery prices going up, heating our homes becoming more expensive, the cost of our dream car making it out of reach again. Nobody is happy when prices rise. But is that true?
Not completely: if you are a borrower, rising inflation can actually be good for your finances.
In recent years and decades, cheap labour from China and increased automatization have reduced the prices of most goods. The liberalisation of energy markets has reduced and kept a lid on our households’ bills. Everything has become more affordable. The combination of those and several other factors have moderated the inflation rate, which has remained around 2% for many years.
Recently, however, there seems to have been changes leading to the latest reading of the UK inflation of 5.4% – its highest level in almost 30 years – driven by the higher cost of clothes, food and footwear, and expected to remain high in the future. We grew unaccustomed to politicians announcing: “we will target higher inflation”, but that is what Boris Johnson admitted last year, announcing that he was looking to transform Britain into a high-wage -hence high inflation- economy.
And that is what Willian Jennings Bryan announced in 1896 in his famous Cross of Gold speech. Bryan wanted to detach the price of dollars from gold to halt deflation (the reduction in prices) in the US that was hurting some of his (potential) voters: farmers with mortgages. Bryan ultimately didn’t win the election, but his logic was sound.
The reasoning is simple: if a household borrows £15,000 at a fixed interest rate, at the end of the term it would still need to repay the same (nominal) amount: £15,000.+ interest! But if we assume that inflation averages 4% each year for the following 5 years, the lender will need an amount equal to £18249.79 to make up for the loss of purchasing power due to inflation (£15,000 + the compounding effect of the 4% inflation rate at 4%). In a way, it is like an average household would save £3249.79 over 5 years thanks to the 4% inflation rate.
Some of you may argue that at least part of that Creditor loss would be compensated by the interest rate charged on those loans. However, even paying a 4% interest rate would just compensate for the certain losses due to the inflation rate and would leave the lender without any profit or cover for the risk of not being paid back, the so-called “credit risk”.
The reality is that there is currently still abundant credit available to families at very good conditions and rates. It is what we call a “borrower market”. But it won’t last for long: inflation rates will push up interest rates and lenders will start to require higher rates to compensate for the expected capital loss due to high inflation.
To sum up, it is in periods like this, with several factors converging to create the perfect conditions for borrowers, that asking for a LOAN, can actually be the smartest move for most families: abundant credit available, relatively low fixed interest rates, high and rising inflation rates could be just the right ingredients to make your next dream come true.
So don’t waste time and get in touch with us – apply now.