SIMON LAMBERT: My 80p bag of crisps shows how inflation creeps up on us, so make sure your money is fighting the spike
My mind long ago anchored the price of an ordinary-sized bag of crisps at 40p, yet creeping inflation means they now regularly cost double that
A bag of crisps: 80p. How did that happen?
I suspect many of us have something that we regularly buy but still catches out when it comes to registering the cost.
For me it’s an ordinary-sized bag of crisps: Walkers Salt and Vinegar, or Smoky Bacon if I’m in luck.
In my mind a bag of crisps still costs about 40p, yet whenever I buy them they seem to cost roughly double that.
This isn’t a case of something you hardly ever buy and then get shocked by the price of when you eventually do – I’ve unfortunately got a real soft spot for crisps – it is a strange anchoring effect that seems to only attach to certain items I purchase.
It’s also a useful lesson in inflation, highlighting how small but consistent price rises can leave your money with only half its purchasing power over what might not feel like that long.
I reckon my 40p anchoring comes from about 20 years ago when I was in my crisp-buying prime.
In my early twenties I was blessed with the kind of metabolism that meant I could buy and munch my way through two or three bags in one go – and with wages in my pocket I could afford that little bit of luxury.
So, what would the inflation rate need to be to double the price of a bag of crisps from 40p to 80p over 20 years? It’s 3.5 per cent.
Taken over a single year, 3.5 per cent doesn’t sound a lot, but compounding inflation is the enemy of your wealth in the same way that compounding returns is its friend.
And this is why the latest 2.5 per cent inflation figure revealed by the ONS for the UK is something worth registering.
It doesn’t sound like much, or that much higher than the Bank of England’s 2 per cent target, but at 2.5 per cent inflation today’s 80p bag of crisps will cost £1.32 in 20 years’ time.
That’s a mere 13p more than with 2 per cent inflation, but you’re losing more than 10 per cent of your crisps here.
You can work this stuff out using an inflation calculator like ours, or calculate long-term gains (or fiddle it for inflation losses) using our savings calculator.
There’s also a rule of thumb for it: the rule of 72.
If you divide 72 by the rate of inflation, it will give you roughly the number of years it takes for the cost of something to double – and your money to lose half its value.
With 2 per cent inflation it’s 36 years, but with 4 per cent inflation it’s just 18 years and with 6 per cent inflation it will only take 12 years.
This was all considerably less of an issue when savings accounts kept up with inflation, but extreme monetary policy since the financial crisis has put paid to that.
Even the top five-year fixed rate savings deals in our savings tables now only pay 1.6 per cent.
The UK’s 2.5 per cent headline CPI figure for June highlights how inflation is spiking
Central banks are convinced that we are currently just having a bit of an inflationary moment. Both the Bank of England and US Federal Reserve have put forward the case that demand and supply going haywire in the aftermath of the coronavirus lockdowns is causing this and inflation will settle back down.
It pays to hedge your bets though and make your money fight as hard as it can against being eroded. And on the plus side if inflation does subside you’ve beaten it by more.
For cash savings that means seeking out the best rate possible – although I’d personally be wary of fixing for the long-term.
A 0.5 per cent easy access rate is rubbish, but it’s a lot less rubbish than your bank’s legacy 0.01 per cent account that the cash might be sitting in now.
It also means considering investing. Maybe not all your money, but some of it.
And you don’t have to go all-in on high octane stuff; a cheap global tracker, a couple of good income investment trusts, a global fund or trust, or even some of the more cautious investment trusts or funds, are all likely to do much better at securing the future crisp-buying power of your wealth than just letting inflation nibble away at it.