How your personal inflation rate could affect your wealth


One-pound coins on a food shopping receiptIn June 2021, the BBC reported that the UK inflation rate was at 2.5%, its highest point in three years. Though not as worrying as the almost 5% inflation rates of the 2008 recession that many people remember, a steady rise is still cause for concern.

The rise is said to be caused by a spike in oil prices and higher food costs. Furthermore, prices for a wide variety of sectors, such as housing and clothing, have all risen faster than 2.5%.

The inflation rate represents an average price rise, which is calculated using the price changes of thousands of everyday items and services. Items which the population spend more money on are given more weight in this calculation.

Inflation can be a problem if your wages are not rising at the same rate, as it means your spending power is falling year-on-year.

Inflation rates also affect people differently. Those who buy more from sectors where prices have risen faster will see their expenditure rise disproportionately.

With the inflation rate perhaps starting to stabilise as the UK moves out of the pandemic, there has never been a better time to understand the concept of a “personal inflation rate.”

Your personal inflation rate will depend on your lifestyle choices

No two people have exactly the same inflation rate. While prices in the UK rose by 2.5% in the year to June 2021 on average, the prices of different products have risen at different rates, and your personal inflation rate will depend on the products you had bought.

For example, consumer price index statistics from Statista show that the only sector to rise by exactly 2.5% was restaurants and hotels. Most other sectors rose somewhere between 1% and 3%, while transport increased by a huge 7.2% and food prices actually fell by 0.6%.

Your personal inflation rate depends on your lifestyle and what you buy. Using the statistics above, if you had spent a lot on travel and transport, then your personal inflation rate would most likely have been above that of the average.

Perhaps you don’t drive, so spend less on petrol and repairs, or you buy more food than the average household? The inflation rates of these different sectors will affect your personal inflation rate, especially as the Guardian reports that the annual inflation of motor fuels is at an 11-year high of 20.3%.

Second-hand cars have also seen an increase of 5.6% due to a shortage of computer chips preventing new builds. If you tend to replace your car every few years, your personal inflation rate may be higher than the average as a result.

The same can be said for your lifestyle choices. If, prior to the pandemic, you were a frequent flyer for overseas holidays or an avid cruise enthusiast, your personal inflation rate would likely be quite high due to increasing travel costs.

Designer brands have also increased sharply in price in recent months. In August 2020, the German newspaper Die Welt (translated by Worldcrunch) reported that some Gucci designs had risen between 5% and 9% in the UK, Italy, and China, due to the economic fallout of the pandemic.

Another lifestyle factor that may affect your personal inflation rate is your health and, thus, whether you consume healthcare and medicinal services at an average rate. The health industry experienced a less-than-average 1.6% inflation rate.

Furthermore, your living situation will also have an effect. Homeowners won’t experience housing inflation in the same way as those who are renting or looking for their first home.

In some ways, inflation may benefit homeowners, as it may drive up the price of their property when they look to sell. In June 2021, the Office for National Statistics reports that private rental prices have fallen in London by 0.1%, but they have risen in the rest of the UK by 1.8%.

It might be worth researching what the levels of inflation look like for the services you are looking to purchase.

Measuring your personal rate of inflation only involves a few simple calculations

One way to measure your personal inflation rate is to figure out how much you spend over the course of a few years. If you spend £50,000 one year and then £55,000 the next, your annual personal inflation rate for that period would be 10%.

However, spending habits are unpredictable, and there are times when unexpected costs significantly bump up your expenses. Perhaps your boiler breaks, or bad weather means you need to pay for home repairs. These can be left out or reduced in your calculations since you don’t make these payments on a regular basis.

The amount you spend each year could be wildly different for any number of reasons, so taking an average after a few years will give you a better idea of how much extra you actually spend year-on-year.

Knowing your personal inflation rate can help you to manage your money effectively

The reason why it is so important to know your personal inflation rate is because your wealth, especially your retirement wealth, will quickly be eaten away by inflation.

Imagine that by the age of 50, you have saved £500,000 into your pension. That money will be worth less in real terms by the age of 70 due to inflation eroding its value.

If you know what your average expenditure is, as well as your personal inflation rate, you’re in a better position to calculate what income you’re likely to need to maintain your desired lifestyle in retirement.

Seeking the advice of a financial planner can be crucial at this time. Not only could they identify ways in which to grow your future wealth, but they could also find ways to mitigate the effect of your personal inflation.

A financial planner will consider your personal goals and create a plan to ensure your savings will sustain your chosen lifestyle when you retire. If that means you need to draw more income every year to take the effects of inflation into account, a planner can incorporate this into your plan.

Get in touch

If you want to know more about how working with a financial planner can help to mitigate the effects of inflation on your wealth, get in touch. Please email or call 0115 933 8433.