Economics question

[Markymark]

For savers, is there a real difference between interest rates at 0.5% and inflation at 0% compared to interest rates at 2.5% and inflation at 2%?

 

[Profpointy]

For savers, is there a real difference between interest rates at 0.5% and inflation at 0% compared to interest rates at 2.5% and inflation at 2%?

Not in my view.

(ignoring the .5% of the 2%)

 

[Markymark]

What I mean is the only thing that matters is the difference between inflation and interest rates, irrespective of the amounts?

 

[Profpointy]

What I mean is the only thing that matters is the difference between inflation and interest rates, irrespective of the amounts?

that would be my view. An economist might say different and there may be psychological factors in play which do affect economics, but I'm merely a mathematician (very loosely speaking)

 

[martint235]

Ok I think so. Bear with me:

0.5% of 100 = .5 less 20% tax = £0.40 less the 0% inflation = £0.40

2.5% of 100 = £2.50 less tax = £2 less the 2% inflation = 0.

I could be entirely wrong.

 

[flake99please]

If you're spending your money on something which is less affected by the base rate of inflation then there could be some difference.

 

[Markymark]

If you're spending your money on something which is less affected by the base rate of inflation then there could be some difference.

I guess you can say that conversely too. It would make sense to average it out though as inflation tries to be across the board?

 

[Profpointy]

Ok I think so. Bear with me:

0.5% of 100 = .5 less 20% tax = £0.40 less the 0% inflation = £0.40

2.5% of 100 = £2.50 less tax = £2 less the 2% inflation = 0.

I could be entirely wrong.

ooh, you could be right at that.

 

[MossCommuter]

But inflation does not reduce the amount of money that you have - it reduces the spending power of that amount.

Interest is paid at regular intervals too where as price adjustments are more less predictable and your personal inflation rate depends entirely on what you spend your money on.

 

[martint235]

The answer I gave is a very basic one. I don't think there is an indisputable answer as just suppose you spent the money you gained in interest on tax deductable, 0 rated goods. The calculations could get very complicated very quickly.

 

[Haitch]

2.5% of 100 = £2.50 less tax = £2 less the 2% inflation = 0.

I could be entirely wrong.

Doesn't 2% of 102 = 2.04, meaning your money is actually worth less than when saved at 0% interest and 0% inflation?

 

[MichaelO]

It's only relevant if your only source of income is as interest.

 

[MartinQ]

Long term a bit (forgetting about tax). You'll get a greater return with a 2.5% interest rate and 2% inflation.
Over 10 years, the return would be 6.1% above inflation compared to 5.1% for the 0.5% interest.

Both in the noise though.

 

[Markymark]

Long term a bit (forgetting about tax). You'll get a greater return with a 2.5% interest rate and 2% inflation.
Over 10 years, the return would be 6.1% above inflation compared to 5.1% for the 0.5% interest.

Both in the noise though.

Is that based on both savings and costs rising compound?

 

[srw]

Conventionally in economics and finance, no difference at all. @MartinQ's numbers look fishy to me but I'm not in front of a spreadsheet to check.

I passed an entire pensions exam on that one fact.