Rising costs are putting huge pressure on household budgets – with everything from energy bills to petrol prices ramping up in recent months.
Inflation is soaring at a decade-long high and could hit five per cent by the spring, the Bank of England predicts.
But some households are facing price hikes several times higher than the official inflation figures suggest, experts warn.
Inflation is a measure of how much the price of goods and services is rising on average, in comparison to the previous year.
Rising costs are putting pressure on household budgets as prices ramp up in recent times
The Office for National Statistics, which compiles the data, collates the prices of some 700 everyday items and services to come up with a single, overall figure for the UK inflation rate. This is known as the Consumer Prices Index (CPI).
But that headline figure masks huge variation in price rises among different items and services.
Depending on what you spend your money on, the rate of inflation that you experience could be lower – or much higher – than the official rate.
For example, if a lot of your budget tends to go on travel costs, that will push up your personal inflation rate, because, at 9.9 per cent, transport costs are more than double the average rate of inflation.
Similarly, if you buy a lot of shoes and clothes, that may have pushed your personal inflation rate down because, at -0.4 per cent, the cost of these items has actually fallen on average.
Who has the highest personal inflation rates?
The cost of many core household bills has risen significantly more quickly than the official 4.2 per cent rate of inflation.
These bills make up a higher proportion of the outgoings of the poorest households and, as a result, inflation will be hitting them hardest. They are also difficult to cut back on.
For example, housing, water, electricity, gas and other fuel costs have risen by 6.8 per cent. Inflation rates for older pensioners, in particular, are likely to be considerably higher than average.
Rob Burgeman, of wealth manager Brewin Dolphin, warns: ‘I think some people currently have a personal inflation rate of several times the average CPI figure.
‘They are likely to be those on low incomes as they spend money on the basics and not on things coming down in price like technology,’ he says.
‘Once people reach their 80s, the rate can be even higher if they need long-term care, for which costs tend to rise at five to ten per cent a year.’
Wealth managers Rathbone Investment Management and St James’s Place say their wealthiest clients have particularly high rates of personal inflation.
Private school fees, which have been rising by twice the current rate of inflation on average and by three times in the case of the top schools, are a primary driver. So are the more upmarket childcare and elderly care services.
Doug Brodie is director of retirement income specialist adviser Chancery Lane. He believes that personal inflation rates vary depending on individual lifestyles.
He says: ‘For example, a parent who has to commute to work every day and eat away from home on a regular basis could have a personal inflation rate higher than the CPI.
‘Because their family needs to live in a warm home, they can’t even cut back on utility bills.
‘But a young tee-totaller with no kids who rides a bicycle could enjoy a negative inflation rate.’
You can work out your personal inflation figure by using a calculator on the website of wealth manager Rathbones at Rathbones. com/personal-inflation-calculator.
You enter an estimate of your expenditure on a variety of items such as food, communication and travel, and it works out your personal inflation rate and how it compares to the average in the UK.
How do you stay on top of inflation?
If you can keep your income rising at the same pace as your personal rate of inflation, you should not see an adverse impact on your standard of living. This is easier said than done.
Those in work may struggle to get a pay rise that beats inflation, while those in retirement are likely to be living on a fixed income that does not move with inflation.
Fortunately, the state pension has some inflation protection and will rise by 3.1 per cent from April, in line with September’s inflation rate.
However, inflation has risen since then and is likely to continue to do so.
So, for those dependent on the state pension, the 3.1 per cent will not be nearly enough to maintain their standard of living.
If you’re unable to increase your income, an alternative is to cut back on expenditure, or buy cheaper goods.
For example, the cost of butter has risen by 6.4 per cent over the past year, but margarine has risen in price by 15.6 per cent.
Bread prices are up 1.6 per cent while flour is down 14 per cent. The price of chicken is up one per cent, while lamb is 8.5 per cent more expensive than a year ago.
How to protect your nest egg
Here is not a single savings account available that currently beats inflation although it is still worth shopping around to get the best rate possible.
However, savers with large nest eggs sitting in cash that they will not need for at least five years may want to consider investing instead – where there is a better chance of an inflation-beating return.
Investing is not advisable if you are likely to need your money soon or have a low appetite for investment risk.
PHONE AND BROADBAND MAY RISE 10%
Phone and broadband price rises are set to hit double digits next year as telecoms providers add further pain to already stretched household budgets.
Most phone and broadband contracts have clauses in their small print stating that bills will rise every March by around 3.9 per cent plus the inflation rate in January.
If inflation is four per cent, bills could rise in March by close to eight per cent.
For someone with a mobile phone, home phone and broadband contract, this could easily add up to an extra £100 or more just on annual telecoms bills.
Price comparison service Uswitch and our sister publication Thisismoney.co.uk has crunched the numbers for typical phone bills.
They found that a BT broadband customer would pay an extra £25.50 a year and a mobile phone customer with a handset £35.55 a year if prices rise by 4 per cent inflation plus 3.9 per cent.
Average monthly broadband, paid TV, mobile and broadband bills are currently £79.22 a month. Households would pay an extra £75.10 a year on average.
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