Question

how are savers affected by high inflation

Answer 1

Inflation means a sustained increase in the cost of living. It means the value of money will decrease.If you owe someone £1,000, inflation will make this relatively easier to pay off.Assume that if prices go up by 10% a year wages also increase by 10% a year. This means each year you have an extra 10% income but the actual amount you owe stays the same. Therefore to pay back the loan requires a smaller % of your income.If prices and wages rise, then a lender who receives £1,000 in five years time will be worse off – because getting the same amount of money, with a higher cost of living means you can buy fewer goods.If savers keep £1,000 in cash, then inflation will reduce its value and in the future, it will buy fewer goods.