Why calculating your “personal inflation rate” can help you manage the cost of living crisis

Financial Planning

Friends sitting in a restaurant clinking glasses

Over the last few months, inflation has rarely been out of the news. The Office for National Statistics (ONS) reports that, in the year to April 2022, prices rose at 9% – the highest rate of inflation for 40 years.

While UK inflation is calculated by the Consumer Price Index (CPI) across a selection of products and services, your personal inflation rate will almost certainly differ from this national average.

This is because what you and your household spend money on will vary from other households. For example, you may spend a substantial amount of money on your mortgage each month, whereas your neighbour may not have a mortgage, and instead they might spend money on travel and dining out.

As inflation rates vary between categories, and indeed individual products and services, your personal inflation rate is – as its name suggests – very specific to you.

Read on to learn more about your personal inflation rate and how to calculate it.

Inflation is the rate at which prices rise

Let’s look at how inflation works. Inflation occurs when a pint of milk, a loaf of bread, or a litre of fuel costs more today than it used to.

This year, the UK has seen some of the highest rates of inflation for decades. While some inflation is considered good for the economy, inflation that is too high – like it is now – can cause real problems. At times like this, people’s wages aren’t generally increasing in line with inflation, meaning they are worse off in real terms.

What a personal inflation rate is

The overall rate of inflation works out the average changes in costs of more than 700 goods and services.

Conversely, your personal inflation rate is based on your personal spending habits. This includes your eating and drinking, how you travel, whether you smoke, how you exercise, and many other elements of your lifestyle.

All these factors affect your personal inflation. Your personal rate shows how price increases affect you individually, regardless of the national inflation rates.

As a general rule, if you spend above average (relative to the rest of the population) on items and services that have increased more dramatically in price, your personal inflation rate will be higher.

For example, if you drive a lot, your personal inflation rate may be higher than average thanks to the sharp rise in fuel prices in recent months.

And, if you enjoy eating out, you’re also likely to have a higher personal inflation rate. The ONS report that the prices of restaurants and hotels rose, overall, by 2% between February and March 2022, the largest change between these months since records began in 1988.

On the other hand, if you spend relatively more on products where inflation is lower, your personal inflation rate will be below the national inflation rate. Working out your personal inflation rate will allow you to see how inflation specifically affects you.

Why working out your personal inflation rate can benefit you

Working out your personal inflation rate will let you see more easily how the rising prices are affecting you individually.

You’ll also gain a clear perspective on changes in your spending and, for example, how inflation is likely to change the amount you need to draw from your income in retirement.

Calculating your personal inflation rate can be a little time-consuming but is relatively simple using a spreadsheet.

It might be easiest to use the same categories as the Consumer Price Index (CPI):

  • Food and non-alcoholic beverages
  • Alcohol and tobacco
  • Clothing and footwear
  • Housing and household services
  • Furniture and household goods
  • Health
  • Transport
  • Communication
  • Recreation and culture
  • Education
  • Restaurants and hotels
  • Miscellaneous goods and services.

Gather your bank and credit card statements from this time last year and enter the month’s itemised spending into your spreadsheet. Then, in a separate column, enter your spending from the same month of this year.

Add up your totals across each of the categories for both columns. Remember to include any large purchases you’ve made in the last year – such as annual car insurance – by dividing them by twelve, for the month’s allocation.

To work out your personal inflation rate, take your total monthly spending from a year ago and subtract it from your current monthly costs. Then, divide that amount by last year’s monthly spending total.

For example, if last month’s outgoings total was £4,500, and this time last year it was £4,250, the difference is £250. Divide £250 by £4,250 – your personal inflation rate is 5.9%.

Ways to minimise the impact of inflation

However high your personal inflation rate, there are ways to reduce the impact going forward.

  • Monitor the nice-to-haves. If you can reduce entertainment and dining out expenses, for example, you could see a real difference in your spending.
  • Plan for the future. For any large expenses you can see on the horizon, such as a child’s school or university fees, set up a savings or investment account now and pay into it monthly.
  • Look after yourself and your things. Having regular medical check-ups can cut the chances of any unexpected illnesses reducing your income. Keeping up routine maintenance on your house and car can help to avoid sudden breakages and expensive repairs.
  • Get professional advice. Speaking to a financial planner about your situation can help you plan effectively for the future.

Get in touch

If you’re concerned about inflation, and you would like to discuss your financial situation in detail, please email info@investmentsense.co.uk or call 0115 933 8433.

Please note

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.