Metis AM
The rise in inflation and the cost of living crisis has been one of the most widely reported news stories of 2022. In November, inflation was reported to have risen to 10.7% year-on-year, up from 5.5% in January.
You might have found the headlines on this topic concerning, but it is important to remember that the media can only tell you the national average of inflation.
You will experience inflation differently from someone else depending on what you spend your money on. So rather than dwelling too much on headline inflation in the UK, understanding your personal inflation rate could be far more useful.
Read on to learn more about your personal inflation rate, why it’s so important, and how to calculate it.
Inflation happens when the cost of goods and services rises each year
A little bit of inflation each year is good for keeping the economy moving smoothly, but high levels of inflation, such as those we’ve seen this year, can be harmful to consumers and businesses.
Headline inflation in the UK is measured by the Office for National Statistics. Every month they monitor the prices of 700 different goods and services that make up the average UK shopping basket, and how those prices change over the course of 12 months. This data provides us with the Consumer Price Index.
Headline inflation is the average of those price changes, since some of the items increase (or decrease) in price by more or less than others.
In particular, the cost of food and energy has risen significantly in 2022. This was caused by increased demand after the end of Covid lockdowns, combined with the reduced availability of gas from Russia as a result of the conflict in Ukraine.
You will experience inflation differently depending on what you spend your money on
The things you spend on regularly will affect your personal experience of inflation, since headline inflation is an average measure from a selection of goods and services.
If you have a long drive to work each morning, your personal inflation rate may be higher than average because of the sharp rise in fuel prices this year. Then again, if you walk to work each day, your personal inflation rate might be lower than average for the same reason.
Calculate your personal inflation rate using some simple maths
Calculating your personal inflation rate is quite straightforward. You can either use an online calculator, or you can use the following method:
- Look at your expenses in November 2021, and subtract this amount from what you spent in November 2022 to discover the difference. Discount any large one-off purchases and focus on your regular expenditure.
- Divide the difference by the cost of your expenses in November 2021 and multiply the result by 100.
- This gives you your personal inflation rate.
As well as looking at the overall inflation rate of your regular expenses, notice if any particular expenses have risen by significantly more. This is where you could cut costs by looking for a more affordable alternative.
Your personal inflation rate provides you with important information for the future
When you know your personal inflation rate, you may be able to budget more effectively because you will notice which areas of your lifestyle are likely to be costing you more.
It can also be helpful for retirement planning. As well as having a better understanding of how much you can afford to save into your pension or other savings each month, you’ll also be able to calculate how much income you will need to draw each year from your pension when you reach retirement.
It’s also an invaluable exercise in tuning out the noise of sensationalist headlines and focusing on your personal circumstances. At times of rising inflation in particular, it can be easy to feel overwhelmed, which could lead you to worry or panic about the future.
Instead, take control by increasing your understanding of your own finances and tweak things as necessary with the help of your financial planner.
Get in touch
If you’d like to understand more about your personal inflation rate and how to achieve your financial goals despite rising costs, we can help. Please email enquiries@metiswealth.co.uk or call 0345 450 5670.
