6.2 Changing rates of inflation

Question 1

Why must you also look at changes in interest rates when considering impact of an increase in inflation?

Answer 1

Interest rates are used as a tool of monetary policy to curb inflation so a rise in inflation will almost certainly cause the BoE to raise Bank rate

Question 2

Real income definition

Answer 2

The value of people’s income in terms of its purchasing power

Question 3

How will someone experience an increase in real income?

Answer 3

If their wages increase by more than the rate of inflation

Question 4

What did the Government announce that it would award public sector workers in 2014?

Answer 4

A 1% pay rise when inflation was almost double that

Question 5

Real interest rate definition

Answer 5

The difference between the nominal interest rate and the rate of inflation

Question 6

What is the nominal interest rate?

Answer 6

The percentage figure

Question 7

What is the impact of rising inflation on savings?

Answer 7

Higher inflation means a fall in people’s real incomes so their cost of living will increase and they will have less to save

Question 8

Ways providers are trying to make savings accounts more attractive:

Answer 8

• Teaser rates
• Higher interest rates for those who are willing to commit a larger sum of money for longer or to those who are existing customers

Question 9

Are most savers receiving positive or negative real interest rates?

Answer 9

Negative

Question 10

What are index-linked savings accounts?

Answer 10

Savings accounts whereby the rate of interest always keeps up with the rate of inflation - they are not available currently and never go higher than inflation

Question 11

What is an annuity?

Answer 11

A product whereby the customer pays a lump sum and in return receives an agreed set annual amount for the rest of their life

Question 12

Why is there a cost involved in an index-linked annuity?

Answer 12

The amount paid annually will initially be much smaller

Question 13

What is the annual income that someone aged 65 could purchase with £100,000 for a single-life, non-index-linked, no guarantee annuity?

Answer 13

£5,098 annual income

Question 14

What is the annual income that someone aged 65 could purchase with £100,000 for a single-life, non-index-linked, five-year guarantee annuity?

Answer 14

£5,087 annual income

Question 15

What is the annual income that someone aged 65 could purchase with £100,000 for a single-life, index-linked, five-year guarantee annuity?

Answer 15

£3,120 annual income

Question 16

What does it mean if an annuity has no guarantee?

Answer 16

Payments stop when the person dies

Question 17

What does it mean if an annuity has a five-year guarantee?

Answer 17

Payments continue to the next of kin if the person dies within five years of purchase

Question 18

How have providers helped people face the problem of a higher interest rates meaning higher monthly repayments for borrowers?

Answer 18

Fixed-term interest mortgages, usually for between two and five years - bank may charge a fee