Inflation raises spectre of money losing its value

Prices, from bread to petrol, are 3.7% higher than last year. History has grim warnings on where it might end.

Picture a restaurant where no menus could be printed because by the time the food was ready the price would already have gone up. Or a savings account where deposits became almost worthless overnight.

With money losing its value so quickly, how would we cope? Perhaps by demanding payment for our work by the hour, so that we could spend money while it was still worth something. Or by returning to a medieval system of bartering goods and services.

It may sound far-fetched, but all of these scenarios have occurred in parts of the world where rising prices get out of control. Inflation, when prices rise and the purchasing power of money decreases, then becomes hyperinflation.

In Zimbabwe a few years ago, for example, prices were doubling every 24 hours, and in the end paper money became worthless; the Zimbabwean dollar was abandoned in favour of foreign currencies. In Germany during the 1920s, monthly inflation reached 29,500%.

Here in the UK, inflation peaked at 25%t in 1975, averaging 13% across the 1970s, which the Bank of England now calls ‘shocking’. Prices had been pushed up by generous wage increases, the cost of oil for fuel and government spending. The upward spiral didn’t slow down until 1983.

At 3.7%, we are nowhere near that level now, but shop prices are being increased by some factors beyond our control. Climate change is causing bad harvests, making basic foods scarcer and more expensive, including wheat, sugar and cocoa. Oil and fuel costs are also rising.

The problem here has also been made worse by the 2008 crisis in the financial system. The pound lost value against other currencies and the Bank of England printed more money.

This has led experts to suspect that the UK, the USA and other countries that borrow a lot of money might be happy to see the national debt eaten away by inflation. Meanwhile, their citizens are left to cope with the day-to-day consequences.

Winners and losers

When inflation goes up, ordinary families can struggle to meet rising bills. People who have worked hard to build up their savings see them wiped out. But not everyone loses.

Households with a lot of debt, for example in the form of a large mortgage, will also benefit as the amount they owe effectively shrinks: If each £1 has less buying power, £1 of debt is also less of a liability.

You Decide

  1. If food prices rise, we suffer less than poorer countries. Even when times are tough, should we count ourselves lucky?
  2. Does the financial system favour people, countries and companies that build up debt? Do responsible savers and careful governments always lose out?

Activities

  1. Research the effects of hyperinflation in Zimbabwe, or historical examples in Germany’s Weimar Republic, or South America. Write about how daily life is affected, either in a song lyric, a poem or an imaginary diary.
  2. If you were a member of the Bank of England’s Monetary Policy Committee (MPC) would you recommend a rise in interest rates? Write a short speech to your colleagues explaining your position.

Some People Say...

“I don’t trust paper money. I prefer something with real value, like gold or diamonds.”

What do you think?

Q & A

What is hyperinflation?
If prices are rising by more than 50% every month, that is sometimes defined as hyperinflation. It usually only occurs during war or times of severe political or economic crisis. Examples include Germany between the two World Wars.
So it won’t affect the UK, right?
We are already facing prices rising at almost twice the Bank of England’s target inflation rate of 2 per cent. Commentators are divided about whether the UK could ever be pushed into hyperinflation, but even the levels seen here in the 1970s would be destructive.
What can be done?
Since 1992, after a previous financial crisis, there has been a target to keep the cost of living down. This mainly depends on the Bank of England’s Monetary Policy Committee setting interest rates, which affect how much we pay to borrow money and how much our savings can earn.

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