Debate Magazine

Economic Myths: "The Purchasing Power of the Pound Has Fallen by 235 Times in a Hundred Years"

Posted on the 01 April 2015 by Markwadsworth @Mark_Wadsworth

On the face of it, this factoid trotted out by the gold bugs at MoneyWeek is quite true, it implies that average price inflation over the last hundred years was 5.3% per annum.
But that ignores the compound interest which £1 would have earned in the meantime. By and large, and in the grander scheme of things, the interest you can earn is equal to annual price inflation, sometimes a bit more, sometimes a bit less.
So if you'd stuck £1 in the bank a century ago and allowed the interest to roll up, you'd have about £235 and what you'd be able to buy with it today is much the same as what you'd have been able to buy with £1 a century ago.
And there are two further caveats:
1. The downward trend in the real price of manufactured goods. You can get a pretty decent TV or a mobile phone/camera/music player for £235 nowadays, you would not have been able to buy anything near as cool for £1 a century ago. Maybe a wind up 'phonograph' or something? Even if your compound interest less tax deducted is 'only' £100, you can still get a lot more manufactured for your money.
2. The upward trend in the real cost of land. Rents back in 1910 were between three and five shillings a week, so £1 was one or two months rent; nowadays £235 is more like one or two weeks rent (although the quality of rented accommodation is much better).
So all in all, so what? It is not price inflation itself which robs savers, it is negative real interest rates.

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