Some say that inflation is good. The capital of your mortgage becomes eroded, whilst your house price goes up for instance! This is an argument for an Interest only mortgage, which advisors do not recommend. Repayments are a lot less if no capital is repaid. Take an extreme example – 35 years ago I arranged a mortgage for a lady to buy an End Terrace house, she paid £8,995 for it and wanted a 95% mortgage £8,545 with a deposit of £450. Today the house is worth £160,000 and she would still have £8,545 mortgage if it had been Interest only. People take out more than that for car finance today!
100 Years of inflation has meant that a Teachers annual salary has risen from £176 per annum to £30,889 pa on average. Gold was £18.93 per ounce, now over £600 per ounce and rising.
In 1971 the UK went Decimal – this was a good excuse to put up prices, which many people fear will also be the case if we join the Euro. Inflation can be judged by Mars Bars, which are often referred to in price comparison tables. In 1982 a Mars Bar cost 0.16p, now over 0.45p. Allowing for this price increase, let’s use quantities of Mars Bars to compare inflation:-
Items – Mars Bars 1982 – Mars Bar 2007
House – 147,775 – 474,053
Porsche 911 – 104,500 – 170,000
Aga Gas Double Oven – 6,218 – 15,121
Washing Machine – 1,875 – 560
Gallon Petrol – 10 – 11
Pint of Beer – 4 – 7
Frozen Chicken – 4 – 10
Now let’s look at pensions. If you took out a Personal Pension, as I did, and paid £100 per month from age 30, you were projected to receive a pension of approx £12,000 pa or 6,250 Mars Bars a month at age 65. In fact now at age 55, with diminishing returns and having paid for 25 years, the projection has dropped to £3,000 pa or 555 Mars Bars a month!
So it could be said that ‘A Mars A Day – Helps you Work, Rest and Pay’!