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What is inflation?

Inflation can be the seen as the rise of prices. Whe...

14 April 2021

Martin Cozens

Inflation can be the seen as the rise of prices. When prices go up the value of the currency goes down: the rise of the cost of a pint of beer from £4 to £5 represents a 25% devaluation of the pound because you are having to spend 25% more money to get the same thing.

Central banks and politicians will try to target inflation. They will try and stop it getting too high, but they will encourage a little inflation as they see it as helping growth by getting prices to go up along with wages. They will also see inflation as useful in helping them with their debts. If inflation devalues the pound it is easier for the UK government to pay-off the bonds it has issued at a previously fixed rate. The current inflation target in the UK is 2%. Some people interpret inflation as a tax because it is something everybody has to pay. If wages and economic growth are below inflation then it can affect the prospects and prosperity of millions. Money in the bank will more than half in value within 20 years at just 4% inflation, it will be worth just 44% of what is was. At the time of writing RPI inflation in the UK is 3.5%.

Inflation is the key factor that makes people save in assets other than just putting their money in the bank.

One of the best ways to protect your money from inflation is by putting it into gold. Gold tends to gain in value, meaning it will protect the value of your wealth. Gold is seen as the oldest form of money because, even after thousands of years it still has the same value – unlike many paper currencies which have literally inflated away to nothing. An ounce of gold would have bought you a fine toga in ancient Rome. Today it is worth around £1,000 – enough to buy a fine suit in London.

Not only does gold protect you from inflation but it is also money in its own right and can now be spent instantly anywhere in the world on a Mastercard. This unprecedented liquidity means there is no need to worry about savings being inaccessible in another asset because by using gold you are using inflation-proof money, to some degree.

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