Low Unemployment

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The Impact of Low Inflation on Borrowers and Savers

Inflation refers to the continual increase in prices. The value or purchasing power of money refers to the amount of goods or services one unit of money can buy. Inflation means the value of money is falling because prices keep rising.
Inflation and deflation are both far-reaching titanic forces that spread out and greatly influence returns across all major financial markets. The outcome of the inflation or deflation question is crucial for stock investors, bond investors, real-estate investors etc. Some investment classes tend to do well in during periods of high inflation whereas others tend to do well during periods of low inflation.

The United Kingdom has been fortunate recently that the economy has been basking under an inflation level that has been both controlled and maintained at around 2.5%. Generally, it is assumed that low inflation is good not just for the economy but good for the country as a whole - good for the financial markets, good investors and good for consumers.
Investment returns over recent years have been reasonable. However, if low inflation continues to be maintained, this could well mean that at some point in the future we will begin to experience lower returns from investments.

THAT the real rate of interest is high continues to be the refrain of most economists., this is surprising because interest rates have declined significantly for the past couple of years.
Simply put, real rate of interest is the difference between nominal interest rate and rate of inflation. Now, rate of inflation for manufactured goods is less than 1 per cent.
As such, the lending rates between 8 and 10 per cent for top-rated borrowers continues to be high.
For companies with lower ratings — which incidentally make up a substantial proportion of the total number of companies — the real rate of interest is substantially higher. Such real rates are not conducive...