Will rising inflation affect you?

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There’s no avoiding the headlines – inflation is on the rise, which means life is getting more expensive. So where do we stand and what can we do about it?

What’s all the fuss about?

It’s well known that inflation means the cost of living is going up. When goods and services cost more, your money will buy you less than before. Unless your income also goes up, this leaves you with less in your pocket at the end of the day.

Inflation fluctuates all the time, but now the official rate is rising faster than it has in a decade. One of the biggest upward forces is the global supply chain crisis, cultivated by the ongoing pandemic and aggravated in the UK by Brexit. With demand pushing up energy prices worldwide, alongside a shortage of other goods and services, everyday life is costing more. And with the government’s furlough and other COVID-19 financial safety nets now at an end, households and businesses across the UK are under even more pressure. In these uncertain times, there’s no clear end in sight, and no one can quite agree on how far inflation could go.

Where is inflation now?

Despite what the news might have you believe, there is no one inflation rate to rule them all. Besides the international differences out there, UK inflation can be calculated in various ways. While all of them work by measuring the cost of a basket of goods and services over time, the contents of that basket will vary.

The official measure used in the UK – and the one the Bank of England uses to track its 2% target – is the Consumer Prices Index (CPI). But you’ll often hear about the Retail Prices Index (RPI) too. Both offer a snapshot of an assumed average shopping basket, but how do they compare? Well, as things stood at the end of October 2021, the CPI was at 4.2% and the RPI was at 6.0% – that’s quite a difference.

What this shows is that inflation is relative, with the potential to vary greatly depending on what you spend your money on. That means inflation won’t affect everyone in the same way.

What’s your number?

Because we spend money on our own particular basket of goods and services, we all have our own personal inflation rate.

If you drive a car with a 4-litre engine, for example, you’ll feel the impact of increased fuel prices much more than someone with, say, a hybrid, although this will also depend on whether you use it frequently or over long distances. And if you have a large house with several rooms to heat, you’ll feel the pinch of the energy price hikes more than someone in an apartment or solar-powered home. Similarly, a family with four kids is likely to see their food bill creep up significantly more than a couple with no dependents.

Unless you buy the specific ingredients of the CPI/RPI basket, your overall expense bill is unlikely to increase exactly in line with average inflation. And depending on what goes on your shopping list and how often you buy it, your personal experience of inflation could also be vastly different from the next person.

What can you do about it?

The first sensible thing to do in the face of rising inflation is check your spending habits and adjust them where you can. What do you spend your money on? How much have your expenses gone up? Can you make changes to remove some of the shock without compromising your quality of life too much?

Then take a look at your income. Do you need more to cover your increasing expenditure? If you’re earning a salary, you’re unlikely to receive a pay rise that outpaces the current trajectory of inflation. Similarly, if you’re receiving income from a final salary pension, you’ll find it has to stretch further than ever before. And while the State Pension will be going up in 2022, having been unpegged from CPI in the last Budget, this is now fixed at 3.1% – again falling short of projected inflation.

What about your savings and investments?

Cash in the bank – already stalling from historically low interest rates – will continue to lose value by failing to keep up with the cost of living. Even if interest rates go up for your savings, this will likely fall several points behind the relevant inflation rate.

In high inflation environments, higher-risk assets such as equities tend to fare well, but there’s no telling whether good performance is connected to inflation or other factors. While returns should outpace inflation over the long term, no-one knows how things will pan out in the coming months.

As with any financial challenge, this is no time for knee-jerk reactions. While it makes sense to review your short-term behaviour when it comes to spending and income, you should always have a long-term mindset for your money.

At Fortitude, we believe that a broadly diversified, globally focused, long-term investment portfolio is the best protection against any turbulence, including rising inflation, whatever the weather.

If you’d like us to check your financial arrangements are in the best shape for the challenges ahead, give us a call on 01327 354321.