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Foster Denovo|News & blogs|Opinion|What is your personal inflation rate, and why does it matter?

What is your personal inflation rate, and why does it matter?

You’ve probably heard a lot about inflation in the news over the past 18 months. After an extended period of very low inflation and interest rates, costs began to rise in mid-2021 leading to the unusually high inflation we’re experiencing now.

Rising costs can be concerning, but a lot of the news reports you see about inflation might not actually be relevant to you. That’s because you will experience inflation differently from someone else depending on what you spend your money on.

So even though headline inflation is an important measure to be aware of, perhaps even more important is your personal inflation rate. Read on to find out why it’s so important and how to calculate yours.

Inflation is the average change in price to a UK household’s shopping basket each year

Inflation in the UK is measured by the Office for National Statistics (ONS). They monitor the prices of around 700 items, both goods and services, that make up an average UK household’s shopping basket.

Each month the ONS takes an average of the price changes to those 700 items from the preceding 12 months, which then produces the Consumer Price Index (CPI). This is one of the main ways they measure inflation.

The key point to remember is that headline inflation is an average measure from a selection of goods and services. Some items will have changed in price by more or less than headline inflation, which is why it’s a less helpful measure than something more personal to you.

You will experience inflation differently depending on how you spend your money

Since the headline inflation rate is based on the average price change of goods and services in a UK shopping basket, it may not be accurate for your personal circumstances.

For example, the Financial Times reports that the ONS assumes that the average UK household spends 9.8% of their monthly expenses on personal travel costs. If you don’t own a car and tend to walk to most places, your personal inflation rate may be lower than the headline rate. However, if you drive a lot more than the average, it could mean that your personal inflation rate is higher.

There are online calculators that you can use to calculate your personal inflation rate, but you can also use a simple formula to discover it yourself.

  • Add up the regular expenses you paid for in November 2021, and subtract this amount from what you spent in November 2022 to discover the difference. You should focus on your regular expenses, removing any large, one-off purchases from the equation.
  • Divide the difference by the cost of your expenses in November 2021 and multiply the result by 100.
  • The resulting percentage is your personal inflation rate for the 12 months from November 2021 to November 2022.

Knowing your personal inflation rate can help you to cut costs and inflation-proof your finances

Like so many areas of financial planning, one of the most helpful things about knowing your personal inflation rate is the fact that it will allow you to tune out the noise of those sensationalist headlines.

Anything that doesn’t apply to your own personal circumstances might be better off ignored, so that you can spend more time taking measures that will really improve your own standard of living.

If you noticed that the things you spend your money on have risen significantly in price, this information can help you to clearly see opportunities for cost savings. You might decide to cut down on a few things or replace some items for more affordable alternatives.

You can also take measures to inflation-proof your wealth if it is not currently keeping up with the pace at which prices are rising on your regular expenses.

Finally, knowing your personal inflation rate is particularly useful if you are approaching or in retirement. That’s because it will make it easier for you to work out what income you’re likely to need to take in the future, helping you to manage your withdrawals.

Get in touch

If you’d like to understand more about how to inflation-proof your wealth so that your family is protected from the implications of rising inflation, we can help. Email us at advise-me@fosterdenovo.com or call us on 0330 332 7866.

 

Foster Denovo Limited is authorised and regulated by the Financial Conduct Authority.

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