There’s a debate taking place at the Treasury about our copper coins. But would their removal from circulation prompt inflation? And how does inflation affect you?
The latest report by the Royal Mint has flagged that the production levels for 1p and 2p coins has almost halved, dropping from 500 million in 2015-16 to 288 million in 2016-17. And while it’s not necessarily a topic that’s going to be making front page news, there is a debate raging…well maybe not raging…at the Treasury about the future of our copper coinage. That did hit headlines in March as their review began.
The case being put forward in favour of scrapping them flags that the value of the 1p coin has now been so reduced by inflation that, in effect, it’s now worth less than the halfpenny was in 1984 i.e. when it was abolished. Another reason is that both the 1p and 2p are only legal tender up to 20p so they can’t actually be used by to buy very much and, even when they are paid over, research by the Treasury highlights that some 60% of the coins are only involved in that one transaction before being squirreled away somewhere, lost down the back of a sofa or (inadvertently) thrown away. The costs of keeping the coins in circulation is more than the value of coins themselves.
The arguments against highlight that around 2.7 million of the UK’s population are entirely reliant on cash. But a more powerful view is that ditching them could cause inflation – all those items that end in 99p would be rounded up to the next Pound. That effectively adds on up to 1% to prices, after all how many retailers will round down their prices to 95p?
Research by the Bank of England, however, confirms that scrapping coppers is unlikely to cause inflation. Their evidence is based on a number of studies from around the world where countries have removed the lowest value denomination of their currencies. Indeed here in the UK, the removal from circulation of the halfpenny didn’t actually prompt any inflation either.
But why am I writing about this? It’s because it shows how little we understand inflation.
The latest official statistics for inflation (July 2018) put the consumer prices index at 2.5%, a tick up from the 2.4% level at which it had remained steady for the previous three months. The increase, we were told, was on the back of rising computer games prices and the increasing cost of transport. The increases were however offset by a fall in the price of clothes.
But what happens if you didn’t buy any computer games in the last year? It’s a good question that becomes even more important when you dig into the detail behind the inflation numbers.
This shows that the prices of some 700-odd items are used to calculate inflation. Meanwhile, the top 4% of households aren’t even consulted when they’re drawing up that shopping list and ‘only’ 150 locations are ‘visited’ to check prices. Therefore I can quite safely say that a lot of people’s shopping isn’t considered when the officials calculate that ‘average’ UK basket and that your basket will look remarkably different. In fact, the only thing you can actually count on is that your inflation level is unique.
This uniqueness does mean some work...if only for me as a relationship manager. That’s because I need to help you work out how much money you’ll need in retirement. If you think that £1,500 a month after tax is enough to allow you to lead a comfortable life, that number will have to be higher in the future because of inflation. If you’re set to retire in 20 years’ time, the number actually will need to be more like £2,450, assuming that inflation stays at 2.5%. If we use the average inflation number for the last 20 years (nearer 3.4%), then you’d have to have an income after tax of at least £2,900 to maintain that lifestyle.
The differences between these two numbers highlight how important it is to have a good idea of your own inflation number. The good news is that it can be (boringly, but easily) calculated on a spreadsheet. You don’t have to tally up every item, but it is worth saving the details of this month’s spending and then, in a year’s time, comparing it to what you spend then.
Now, if I haven’t convinced you to start that spreadsheet, at least think back to my point about the 1p being worth less today than the halfpenny was when it was scrapped due to inflation. It underlines just how the value of money erodes over time. And yes, it’s taken 24 years to get to that stage, but that’s not many years off the average retirement (around 20). And if you aren’t buying the average basket of goods, you could live longer than the average number of years after you stop work.
So perhaps it’s worth some sort of a plan to think through how your savings could stack up? Otherwise you could be muttering the old adage ‘fail to plan, plan to fail’ rather too late in life.
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