Some say inflation is good. The principal of your mortgage erodes, while the price of your house goes up, for example! This is an argument in favor of an interest-only mortgage, which advisers do not recommend. Refunds are much less if the principal is not repaid. Let’s take an extreme example: 35 years ago I arranged a mortgage for a lady to buy a house in End Terrace, she paid £8,995 for it and she wanted a 95% mortgage of £8,545 with a deposit of £450. Today the house is worth £160,000 and you would still have a mortgage of £8,545 if it had been interest only. People take out more than that for car financing today!
100 years of inflation has meant that the annual salary of teachers has risen from £176 per year to £30,889 per year on average. Gold was trading at £18.93 an ounce, now above £600 an ounce and still rising.
In 1971 the UK went Decimal – this was a good excuse to raise 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 referenced in price comparison charts. In 1982 a Mars Bar cost 0.16p, now more than 0.45p. Taking this price increase into account, let’s use amounts of Mars Bars to compare inflation:-
Items – Bars March 1982 – Bar March 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 Gasoline – 10 – 11
Pint of beer – 4 – 7
Frozen Chicken – 4 – 10
Now let’s take a look at pensions. If you applied for a Personal Pension, as I did, and paid £100 per month from the age of 30, it was projected that you would receive a pension of approximately £12,000 per year or 6,250 Mars Bars per month at age 65. In fact, now at 55, with diminishing returns and having paid off for 25 years, the projection has dropped to £3,000 a year or 555 Mars Bars a month.
So you could say that ‘A Mars A Day – Helps you work, rest and pay’!