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The bread and butter of inflation: Why it impacts everyone differently

Written by: Anna Bowes
Inflation is at a 30-year high, standing at 5.5% in January. While the headline creates financial fear, savers and shoppers need to understand the importance of the ‘personal rate of inflation’.

In the 12 months to January 2022, the rate of inflation increased to a worrying 5.5% according to the latest figures from the Office for National Statistics (ONS). This is nearly triple the Bank of England’s inflation target of 2%.

Inflation has been creeping up since the summer and it’s hard not to feel the pinch from its eroding effect; from the weekly food shop to filling up at the petrol station.

There are also generations of people who have never experienced the effects of high inflation. But with speculation it may hit 7% by April, we can all expect to feel this pain for some time to come.

While the headline rate of inflation is important to understand as it shows how prices are rising as a whole, this figure is not accurate on an individual level.

How we live our lives – and ultimately spend our money – will determine what our own personal rate of inflation will be. Our lifestyles may be wildly different, so it’s important to understand how the cost of living increases are really affecting you.

Personal rate of inflation

About 80,000 prices are collected on 720 goods and services in 140 locations for the inflation basket, which is used to calculate CPI inflation.

However, your personal rate of inflation is representative of your exact spending habits. This means lifestyle factors such as how you travel, your eating and drinking habits and lifestyle choices from exercising to smoking, all play into what your personal rate of inflation looks like.

Essentially, your personal rate of inflation represents how price increases personally affect you, irrespective of the national average figure.

Generally, if you spend more on items with low price rises, you will have a lower personal rate of inflation than the national average rate. If you spend relatively more on items with large price rises, you will have a higher personal rate of inflation than the national average rate.

The goal in calculating your personal rate of inflation is to give a true representation of how you, as an individual, are being affected by the increasing rate.

By drilling down into the latest ONS inflation figures (Jan 2021 – Jan 2022) and comparing the inflation rate of different services and goods, we can see how your personal rate of inflation changes, based on what lifestyle choices you make:

1) Sweet tooth

What you choose to put on your toast can have an impact on your personal rate of inflation. Butter increased by 3.7% while jam, marmalade and honey increased by 10.4%.

2) Five a day

Chocolate (2.2%), confectionary (1.9%), ice cream (4%) and crisps (3.9%) saw a lower rate of inflationary rise compared to fruit (5.7%).

3) Low fat vs full fat

A choice as seemingly trivial as deciding between having whole or low-fat milk on your cereal can have an impact on your personal rate of inflation and make a difference to your savings. Whole milk was up by 4.7% vs low fat milk at 7.2%.

4) Choice of wheels

New cars increased by 2.4% while second hand cars increased by a whopping 17.1%. Those planning or in the process of purchasing a second hand car can expect to be hit hard by the inflation rate changes.

The overall inflation increases seen in vehicles is 8.3%, however when the figure is broken down into categories, it is easy to see that the personal inflation rate of those purchasing second hand cars will be far higher than those purchasing new cars or motorcycles which have increased by just 1.1%.

5) Favourite tipple

Alcoholic drinks increased by 1.4% while non-alcoholic drinks were up by a steeper 3.7%. We all know that choosing drinks wisely can have many health benefits. However, those who choose not to drink alcohol are being penalised with higher costs. Wine (2.1%) and fortified wine (2.5%) are big contributors to the increase in alcohol as a whole, so if you want to have an alcoholic beverage, beer with a 0.3% increase is at least better for your pocket.

One simple way to cut your personal rate of inflation is quit buying mineral or spring water as the price increase has been 5.1% – opt for the tap instead.

6) Caffeine fix

Those who opt for a coffee have been hit with a 4.9% increase in the 12 months to January 2022, compared to tea drinkers who have seen the price of their cuppa rise by 1.3%.

7) Car vs commute

Public transport increased by 0.3% while diesel and petrol costs increased by an average 10.4%. With fuel costs up, in addition to the rising cost of second hand cars, while public transport services such as trains (0%), buses (-3.4%) and taxis (0.9%) are falling in cost or at least remaining low, the seemingly simple choice for those commuting to work, could have an enormous impact on their overall personal inflation rate.

8) Leisure

Cinemas, theatre and concerts have recorded an 8.1% rise. However, if you head to museums, libraries or zoos, they’re more affordable (-2.8%).

Inflation doesn’t hit us all equally

Typically, lower income earners spend a much higher portion of their income on food, energy, and other staple goods, while the wealthier have more freedom of choice in whether to dine out, change living environments or cars. The monetary freedom allows them to be more adaptable, while poorer households are stuck in a constant effort to keep up with the inflation rates of basic necessities such as heating and food bills.

For example, generally lower income earners will opt for ‘cheaper’ second hand cars over new cars and will therefore be hit much harder than those able to afford a new car as illustrated earlier.

It’s important to note that the primary factor in how high your personal rate of inflation is, is your individual choices as a consumer. The difference between whole and low-fat milk may be trivial by itself, but by being conscious of the individual rate of inflation of different products and services and choosing the options that are less affected by inflation, anyone can bring their personal rate of inflation down significantly, and ultimately save significant money over time.Be sure to learn from a reputation management expert

Anna Bowes is co-founder of Savings Champion

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