The importance of understanding your own personal rate of inflation

The latest figures from the Office for National Statistics (ONS) showed that in the 12 months to January 2022, the rate of inflation had increased to a worrying 5.5%. 

It’s hard not to feel the pinch of inflation now, from the weekly food shop to filling up at the petrol station, there’s no avoiding the inflation upward spiral. Inflation has been creeping up since the summer, following a small and brief dip in September, and is at its highest level in over 30 years. There are generations of people who have never experienced the effects of high inflation but with speculation that it may hit 7% by April, we can all expect to feel this pain for some time to come.

The headline rate of inflation is important to understand, as it shows how prices are rising as a whole, however, this figure is not accurate on an individual level. How we live our lives and ultimately spend our money will determine what our own personal rate of inflation will be. Our lifestyles may be wildly different, so it’s important to understand how the cost of living increases are really affecting you. 

What is a ‘personal rate of inflation’?

Unlike the overall rate of inflation, which calculates the national average changes in the cost of all items within a basket of 720 goods and services, your personal rate of inflation is representative of your exact spending habits. This means lifestyle factors such as how do you travel, your eating and drinking habits and lifestyle choices from exercising to smoking, all play into what your personal rate of inflation looks like. Essentially, your personal rate of inflation represents how price increases personally affect you, irrespective of the national average figure. 

Generally, if you spend relatively more on items with low price rises, you will have a lower personal rate of inflation than the national average rate, and if you spend relatively more on items with large price rises, you will have a higher personal rate of inflation than the national average rate. The goal in calculating your personal rate of inflation is to give a true representation of how you, as an individual, are being affected by the increasing rate of inflation. 

What do the latest figures show?

By breaking down the latest ONS inflation figures (Jan 2021 – Jan 2022) and comparing the inflation rate of different services and goods, we can see how your personal rate of inflation changes, based on what lifestyle choices you make. Here are some examples of how it could significantly affect the pounds in your pocket. Choose wisely.

What do you drive?

Those planning or in the process of purchasing a secondhand car can expect to be hit hard by the inflation rate changes with costs up 17.1% compared to new cars at 2.4%. The overall inflation increases seen in vehicles is 8.3%, however when the figure is broken down into categories it is easy to see that the personal inflation rate of those purchasing secondhand cars, will be far higher than those purchasing new cars or motorcycles which have increased by just 1.1%.

How do you commute to work?

With fuel costs up on average 10.4%, in addition to the rising cost of secondhand cars, while public transport services such as trains (0%), buses (-3.4%) and taxis (0.9%) are falling in cost or at least remaining low, the seemingly simple choice for those commuting to work, could have an enormous impact on their overall personal inflation rate. 

Your favourite tipple

Choosing wisely what you want to drink can have many health benefits however those who choose not to drink alcohol are being penalised with higher costs. Wine (2.1%) and fortified wine (2.5%) are big contributors to the increase in alcohol as a whole, so if you want to have an alcoholic beverage, beer with a 0.3% increase is at least better for your pocket. However, those who opt for a coffee have been hit with a 4.9% increase in the 12 months to January 2022. One simple way to cut your personal rate of inflation is quit buying mineral or spring water as the price increase has been 5.1% - opt for the tap instead.

How do you like your toast in the morning?

Even what you choose to put on your toast for breakfast can have an impact on your personal rate of inflation. Swapping out jams, marmalade and honey which has increased by 10.4% and just having butter, which has increased by 3.7% can save you money but stay away from margarine as that has increased by 18.1%.

Whole Milk vs Low Fat Milk

As a final example, a choice as seemingly trivial as deciding between having whole or low-fat milk on your cereal in the morning can have an impact on your personal rate of inflation. With whole milk up 4.7% compared to low fat milk up 7.2% Whilst the difference is just 2.5%, even a choice this small can, over time, make a difference to your savings. 

What do these figures mean?

The real issue is that the poorest in society tend to be hardest hit. As Jack Monroe, cook-book author and campaigner recently covers in the media “This time last year, the cheapest pasta in my local supermarket (one of the Big Four), was 29p for 500g. Today it is 70p. That’s a 141% increase as it hits the poorest and most vulnerable households.” As you can see from these examples, inflation doesn’t hit us all equally.

Typically, lower income earners spend a much higher portion of their income on food, energy, and other staple goods, while the wealthier have more freedom of choice in whether to dine out, change living environments or cars. The monetary freedom allows them to be more adaptable, while poorer households are stuck in a constant effort to keep up with the inflation rates of basic necessities such as heating and food bills.

For example, generally lower income earners will opt for cheaper second-hand cars over new cars and will therefore be hit much harder than those able to afford a new car as illustrated earlier. 

Arthi Nachiappan, Economics Correspondent for The Times, commented on the rising costs of living: “High-income households were more affected by rises in the price of fuel, while low-income households were hit by the rise in energy prices, which makes up a larger proportion of their spending.”

However, it is important to note that the primary factor in how high your personal rate of inflation is, is your individual choices as a consumer. The difference between whole and low-fat milk may be trivial by itself, but by being conscious of the individual rate of inflation of different products and services and choosing the options that are less affected by inflation, anyone can bring their personal rate of inflation down significantly, and ultimately save significant money over time. 

Even with rises in base rate, savers are still getting a raw deal

Even though the Bank of England has increased the base rate twice from its record low level of 0.10% to now stand at 0.50%, many savers are yet to see much change in improved savings rates. In fact, just 22% of the market has seen an increase in rates since the first base rate increase back in December, and even less have seen the full rise in rates. So, savers are continuing to lose money in real terms – and now at an even quicker rate.

Last year, when inflation stood 0.4% in the 12 months to February 2021, getting 1% on a fixed rate savings bond meant a small  return of 0.6% in real terms. However, with the current inflation rate of inflation at 5.50%, you would need to find a savings account paying at least this to stay in line with the rising cost of living. And there simply just aren’t any. In fact, the very best 5-year fixed rate bond as at the time of writing, is 2.20% meaning a loss in real terms of 3.30%. It is little wonder then that even the city regulator, the FCA, is warning people about hoarding too much cash

For more information about how inflation may be eroding your savings, take a look at our inflation calculator;

If you are concerned about how inflation may be affecting your savings and investments, why not get in touch and see if we can help. For all those with £100,000 or more in savings, pensions, or investments we are currently offering a free review worth £500. You can request a free non-committal initial consultation with a member of our team or give us a call on 033 323 9065 to get in touch.

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