The Goodwin Ruling

The headlines will say how inflation is at its highest point for a decade, how bad the current situation is and how it could get worse.

What’s nearly always missing from those headlines is how inflation affects the average person and, more importantly, what you can do to negate its effects.

What Is Inflation?

Inflation is a general term for how much more expensive the same items are now in relation to what they cost 12 months previous. It is extremely difficult to measure, hence there being various ways of measuring inflation.

The main measures quoted currently are CPI and CPIH.

CPI is the Consumer Price Index and takes a sample ‘shopping basket’ of around 700 goods and services from 150 random outlets across the UK. The price of this ‘shopping basket’ in comparison to the price of the same shopping basket 12 months ago, as a percentage increase, is the CPI inflation rate. This is the statistic you usually see in the headlines.

CPIH is the Consumer Price Index Including Owner Occupiers’ Housing Costs, which is quite a mouthful, and factors housing costs into CPI. The calculation for CPIH is extremely complex and we’ll not go into the full detail in this blog.

How Does Inflation Affect Me?

What you spend your time doing, and what you spend your money on, matter when it comes to how inflation affects you personally.

For example, a headline of ‘5% inflation’ is the total of lots of different changes in prices. A 5% total increase could be made up of huge alcohol and tobacco price increases while everything else stays roughly the same price.

If you don’t smoke or drink, your day-to-day living would be mostly unaffected. If you smoke and drink regularly, you’ll notice you have less money at the end of the month compared with this time last year.

Is Inflation Going Up Really Bad?

If we take the latest CPIH statistics, released on 15^th December, of 4.6% and compare them with the Average Weekly Earnings (AWE) statistics, released a day before, of 4.9% it tells us that we’re actually 0.3% better off now than we were 12 months ago.

Of course, this is an average so some peoples pay will be the same, some will have had a pay cut while others have had a pay rise. How inflation affects you as an individual, is personal to you.

What Can You Do About Inflation Going Up?

For the average working person, there’s nothing you can do to affect the rate of inflation, instead, you should look at things you can do to negate the effects of it.

This comes down to your income and your expenses, however, with the idea of combatting inflation being that you can at least lead the same quality life, reducing expenses isn’t an effective solution.

This leaves your income as the area you can affect the most. For a person still in the workforce, the best thing you can do is increase your income as much as possible. Go for a promotion, earn a pay rise or a bonus, move to a higher paying job. If inflation is 5% and your income has risen 7% in the same time period, you’ve actually had a net gain of 2%.

The easiest thing everyone can do, regardless of being in the workforce or being retired, is to invest any extra savings in something that has the potential to outpace inflation.

If you have £50,000 in the bank, inflation at 5% makes your £50,000 worth £47,500 in 12 months’ time. Investing comes with inherent risks but may be your best chance at keeping up with inflation or beating it.

Ross Megretton.