Will the government really help us against inflation?

Inflation-proof, government-backed savings will soon be back on sale – or will they?

On 19 July 2010, National Savings & Investments (NS&I) abruptly withdrew Index-Linked Savings Certificates from general offer to the public – for the first time ever. These plans were launched in 1975 and were originally available only to pensioners, at a time of high inflation (24.2% for that year).

Yet last July, inflation was only running at 3.1%, so why stop the offer at that time? The Bank of England base rate was at an historic low of 0.5%, therefore inflation was comparatively 6 times higher; but the difference in numerical terms was only 2.6%. In 1975, the BoE rate varied from 9.75% to 12%, with RPI running at more than double that and the rate difference was over 12%.

One reason for the NS&I hiatus will have been the emergency general review of Government borrowing requirements following the General Election. But another may be the kitten-weak condition of the banks, which are trying to fulfil two contrary directives, namely, to lend money again and also to rebuild their cash reserves. Perhaps they are to be spared too much competition. The anticipated rush for NS&I index-linked plans is such that they have set up an email alert system. When offered, the new certificates could sell embarrassingly fast and draw the public’s attention to the Government’s suspected inability to address worries about growing inflationary pressures.

But how much, exactly, are they going to offer, and when? Like many others, I misunderstood the Press (e.g. the Guardian) as saying that £2 billion would be on sale; but NS&I’s release (23.03.2011) merely states that the target for the total funds they manage, spread over all their products, is an increase of £2 billion, which will “allow NS&I to plan the re-introduction of Index-linked Savings Certificates for general sale in due course. Subject to market conditions, NS&I expects to be bringing Savings Certificates back on general sale in 2011/12.”

“… in due course”, “… subject to market conditions”; one could hardly call that a blast on the post-horn.

Going back to the Government’s own Budget plan as stated in the “Red Book” (Annex B, page 90), the guidance is merely that “National Savings and Investments (NS&I) is expected to make a contribution to net finance of £2 billion”, without even a hint that any of this must be from inflation-linked plans.

By contrast, the same page sets a target of £38.4 billion of index-linked gilts. That sounds interesting, except most if not all of that may be taken up by institutions such as occupational pension funds in order to underpin their guarantees to retired members.

What about general savers? Few commercial outfits, if any, can offer guaranteed inflation-proofing and anything like 100% security, let alone exemption from income tax and CGT. This recent article from the Daily Mail details some options, but they are either taxable or risky.

So in some ways, even though inflation is still far from what it was in the mid-1970s, we may be worse off today. Theft by devaluation may have become official, if unstated policy.

INVESTMENT DISCLOSURE: None. Still in cash, and missing all those day-trading opportunities.DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.

10 comments for “Will the government really help us against inflation?

  1. April 25, 2011 at 9:31 pm

    “However, its entire back office operation is contracted out to a German company, Siemens IT Solutions and Services.”

    Run by government in these perilous days. Inflation proofing? Hmmmm. Need to see the fine print.

  2. April 25, 2011 at 9:37 pm

    Buy silver…

    • April 26, 2011 at 5:50 am

      Not gold?

  3. Tim Stanley
    April 26, 2011 at 11:09 am

    Just a second, is a libertarian website suggesting that the government ought to be running a bank (ie NS and I)- isn’t the best thing to do to abolish the institution, why do we need it when we have private banks. In particular the certificates are undercutting the products offered by the private sector so will drive capital out of the private sector and out of productive investment.

    • April 26, 2011 at 1:21 pm

      Tim, this website is a centre-right, classical liberal and libertarian blog. It therefore does not discriminate with authors and the consequence of that is a diversity of opinion. There will be opposed views on many issues and long live opposed views and good debate.

      • Tim Stanley
        April 26, 2011 at 9:43 pm

        It doesn’t alter the point though- I’m not saying this post ought not to be posted- I just don’t understand why governments should be running a bank and am confused by the logic of the article above. It doesn’t explain why the UK should be in the bank business permanently offering deposits.

  4. Andrew Duffin
    April 26, 2011 at 1:02 pm

    Will the government help us against inflation?

    Of course not, the inflation is to help them.

    If it were not, they would have stopped it ages ago.

    • April 27, 2011 at 8:45 am

      Seconded – inflation helps reduce the national debt in real terms – they have no interest in curbing it. Never mind that it makes all of us poorer…

      I think governments should be made to hold a surplus rather than run a deficit (perhaps deficits should be allowable in emergency, after a national referendum?). That way, they’d have every incentive to curb inflation.

  5. sackerson
    April 27, 2011 at 6:00 am

    Hi, Tim. If you’re American, think TIPS. Since governments create inflation via the money supply, they have a moral obligation to protect savers.

    NS&I is not a bank but a quasi-autonomous agency; not so long ago many people didn’t have bank accounts and the banks weren’t interested in offering them to the poorer sort, so we had the Post Office Savings Book. In a way I wish we still had, the money there wasn’t being gambled on deribatives.

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