SIMON LAMBERT: My 80p bag of chips shows how inflation is creeping up on us, so make sure your money fights the spike
My mind long ago enshrined the price of a regular bag of chips at 40 pence, but creeping inflation has now regularly cost them double that
A bag of chips: 80 pcs. How did that happen?
I suspect many of us have something that we buy on a regular basis but still stand out when it comes to recording the cost.
For me, it’s a regular-sized bag of chips: Walkers Salt and Vinegar, or Smoky Bacon if I’m lucky.
In my mind a bag of chips still costs about 40 cents, but when I buy them they seem to cost about double.
This isn’t the case of something you hardly ever buy and then startle at the price of when you eventually do – I have a real soft spot for chips unfortunately – it’s a strange anchoring effect that only seems to attach to certain items I buy .
It’s also a useful lesson in inflation, highlighting how small but consistent price increases can give your money only half of its buying power over what may not feel like that long.
I think my 40p anchoring is from about 20 years ago when I was in my prime purchase.
In my early twenties, I was blessed with the kind of metabolism that meant I could buy and eat two or three bags at once—and with the pay in my pocket, I could afford that little bit of luxury.
So, what would inflation have to be to double the price of a bag of chips from 40p to 80p in 20 years? It’s 3.5 percent.
Taken one year from now, 3.5 percent doesn’t sound like much, but raising inflation is the enemy of your wealth, just as increasing returns is its friend.
And this is why the latest inflation rate of 2.5 percent revealed by the ONS for the UK is worth recording.
It doesn’t seem much, if not much higher than the Bank of England’s 2 percent target, but with inflation at 2.5 percent, the current 80p bag of chips will cost £1.32 in 20 years.
That’s only 13p more than at 2 percent inflation, but you lose more than 10 percent of your chips here.
You can figure this out using an inflation calculator like ours, or calculate long-term gains (or play for inflation losses) using our savings calculator.
There is also a rule of thumb for this: the rule of 72.
Dividing 72 by inflation gives you roughly the number of years it takes to double the cost of something — and lose your money half of its value.
At 2% inflation it is 36 years, but at 4% inflation it is only 18 years and at 6% inflation it only takes 12 years.
When savings accounts kept up with inflation, all of that was considerably less of an issue, but the extreme monetary policy since the financial crisis has made it so.
Even the best 5-year fixed-rate savings deals in our savings tables now only pay out 1.6 percent.
UK CPI of 2.5 percent for June shows inflation rising
Central banks are convinced that we are just having a bit of an inflationary moment right now. Both the Bank of England and the US Federal Reserve have put forward the argument that supply and demand skew in the wake of the coronavirus lockdowns is causing this and that inflation will slow down.
However, it pays to hedge your bets and let your money fight erosion as hard as you can. And on the plus side, if inflation declines, you’re beaten by more.
For cash savings, that means looking for the best possible interest rate – although I personally would be wary of setting for the long term.
A 0.5 percent easy access is bullshit, but it’s a lot less bullshit than your bank’s old 0.01 percent account that the money is now in.
It also means considering investing. Maybe not all your money, but some of it.
And you don’t have to go all in for high-octane stuff; a cheap global tracker, a few good-income mutual funds, a global fund or trust, or even some of the more prudent investment trusts or funds, are likely to perform much better at securing the future sharp purchasing power of your wealth than let the just nibble on inflation.