Inflation has turned £100 into less than £20

One stockbroker explains the corrosive effect of inflation.

The dangers of inflation Photo: Larry Lilac / Alamy

By Paul Killik, senior partner at stockbroker Killik & Co

How would you feel if you bought a security for £100 back in 1971, and it was worth less than £20 today? Unfortunately, if you are over 60 years old, as I am, you will probably have done exactly this, as this is how much the purchasing power of sterling has fallen over this period.

To put it the other way around, had I gone into a supermarket 40 years ago and bought a trolley of goods for £20 and then returned to the supermarket today to buy the same trolley of goods, it would cost me £240.

Inflation is the most insidious investment risk, but its destructive power is frequently ignored by investors and financial regulators alike. There is a tendency to believe that if you save a pound, then, providing you get your pound back, plus a return while you were not using the money, all is well.

Wrong! Money is simply a form of exchange and its true value is determined by what it can purchase, not by its face value.

For the value of your money on deposit to hold its purchasing power, you would have to generate an interest income, after tax, equal to the rate of inflation. Even to a standard-rate taxpayer, that demands a return of 6.25pc with inflation at 5pc. What is more, you can't spend it – you have to save it.

from The Telegraph