Personal account

Inflation is an insidious enemy of savers but can be the borrower's friend. Funnily enough, investors in real assets such as shares and property or pooled funds in these sectors also stand to gain. This week's warning from the Bank of England that base rates must go up again - perhaps as early as next month - prompted fears about what it will mean for homebuyers. But savers have better reasons to fret.

By eroding the real value of money - that is, its purchasing power - inflation eases the burden on borrowers, who can repay debts with cash that is worth less than it was when the loan was taken out. For the same reason, by reducing what every pound can buy, inflation robs savers who are repaid for their thrift with 'funny money'.

How humorous you find all this depends entirely upon your point of view. Even at the current annual rate of increase in the Retail Prices Index (RPI) of 4.5 per cent , the value of money will halve in 16 years. As that is much less than average life expectancy at retirement - 22 years for men aged 65 and 29 years for women at 60 - then even today's subdued level of inflation is potentially ruinous.

For example, the apparent security of bank and building society deposits - or fixed rate bonds - could prove illusory over the period pensioners are likely to spend in retirement. That is why this section leads today on assets which might retain their real value despite inflation.

Several short-term fixed-rate deposits and bonds currently offer higher returns than RPI. But investments, shares and property or pooled funds invested in these sectors are more likely to prove effective long-term stores of value. The reason is that investors in these assets own a share in the companies that produce the goods and services we buy every day. These companies may raise the prices of those goods and services to cope with inflation and increase dividends paid to shareholders.

Investors in real assets also own a stake in economic growth - like that created by inventions, such as the internet, or the opening up of new consumer markets, such as India and China.

By contrast, depositors and bondholders have the comfort of capital guarantees but history has shown they are vulnerable to inflation.

We need not trouble our heads, here, with the paradox that the reason the Bank is considering raising base rates from their current level of 5.5 per cent is to reduce its official measure of inflation below a target of 2 per cent per annum. Whatever the macroeconomics, the immediate effect of raising base rates would be to increase what ordinary people recognise as the cost of living.

For example, another quarter percentage point on the Halifax's standard variable rate would increase the monthly cost of an interest-only £100,000 mortgage to £646. That's £21 a month more than current costs or £102 a month more than it cost a year ago. Finding another £1,224 a year out of taxed income would stretch many homebuyers - and break some. But the fact remains that generations of homebuyers gained from double digit inflation during the 1970s and 1980s.

Strange though it is to relate, mortgage costs are excluded from the Bank's favoured measure of inflation - which is not RPI but the Consumer Price Index. Nor is council tax - another fast riser which could have much further to go - included in the CPI.

No wonder wags say it might as well be the Chinese Price Index for all the relevance it has to most people's cost of living. Funny old thing, inflation. But only so long as you can afford to keep feeding the interest meter.

Regulators and reporters

It is sometimes said the correct relationship between a journalist and the authorities is that between a dog and a lamp post. That is fair enough - although spin and media manipulation have been taken to such lengths in recent years that it is not always clear who is shedding light on whom.

Even so, I was struck by the truth of recent remarks by Sir Callum McCarthy, chairman of the Financial Services Authority (FSA). While a certain type of wiseacre has always decried falling standards in the press, Sir Callum asserted "a strong belief in the contribution that journalism can - and often does - make to a more open society".

This was particularly surprising, given that some of his predecessors regarded reporters with a mixture of fear and loathing that bordered on the psychotic. But, the chief City watchdog explained, journalists can "help bridge the abyss between the expertise of those who construct and sell financial products and those who use and buy them; what economists call the information asymmetry". If that sounds high falutin', he added: "For example, if asked to choose between receiving 10 per cent of £300 and £35, more than 20 per cent of adults choose the lower sum - or, putting it more starkly, one in five of the population would not have understood the first half of this sentence."

He pointed out that 15 per cent of people with cash individual savings accounts (Isas) think they have exposure to the stock market, while 40 per cent of those with stock market Isas think they have no exposure to the stock market. Oh dear.

On a brighter note, Sir Callum said: "There are many things which journalists write which help, if not in bridging, at least in reducing this gap." He went on to list comparison tables, plain language Q&As and real life case studies - just the type of thing with which readers of this section will be familiar.

Then, as if he were writing this column for me, he said journalists must do more to "encourage users of financial services to realise they have responsibilities as well as rights; that decisions on how to finance education, housing, health and pensions are unavoidable and should be faced up to; that it makes sense to think at least as long about those decisions as it does about the decision to buy a fridge, a hi-fi or a car."

Perhaps Sir Callum's remarks seemed particularly perceptive to me as he was speaking at the prestigious Wincott Foundation Lunch in the City's splendid Mansion House, where Colette Bowe, former chief executive of the Personal Investment Authority, was about to present me with the personal finance journalist of the year award. Perhaps. But I don't think so. After all the critical things I have written over the years about the FSA - and its incompetent predecessor, the Securities and Investments Board, a ship of fools if ever there was one - I was genuinely touched by Sir Callum and Colette's kind remarks.

Sceptical readers may raise an eyebrow, if they will. But not, I hope, a leg.