Your personal inflation rate – why understanding it could help you protect your wealth

By HarperLees

A recent article by the Guardian includes predictions from the Bank of England that suggests the difficult economic times are far from over, as UK inflation could reach 11% by the end of 2022.

When you consider that the Office for National Statistics (ONS) showed inflation stood at 9% in April due to soaring food and energy costs, 11% looks increasingly likely. While the figure is high enough, in reality, your personal rate of inflation might be even higher.

If it is, the value of your wealth might be shrinking in real terms more quickly than you thought.

Read on to discover more about your personal rate of inflation and why understanding it could help you protect your wealth from its effects. Before you do though, let’s recap on what inflation is and why it could be bad for your wealth.

Inflation is when you pay more to maintain your lifestyle over time

Inflation is the increasing cost of goods and services over time, and could affect everything from your utility bills to your weekly shop. Because of inflation, £1 typically buys you more today than it will in the future.

To demonstrate this, you might want to use an inflation calculator, which reveals that you would need £192 in April 2022 to buy the same goods and services that cost £100 in April 2002.

Over the last two decades your money needed to almost double (92%) in value to keep pace with inflation, which averaged 3.3% a year during the period – substantially below April 2022’s inflation rate of 9%.

If your money is not keeping pace with inflation, it could be shrinking in value in real terms, something we will consider in more detail in a moment. First, let’s look at how the ONS calculates its rate of inflation and why yours might be different.

The UK’s inflation rate is calculated using a “basket” of goods

The ONS’s rate of inflation is an average that is calculated using the prices of a “basket” of more than 700 goods and services. These include meat-free sausages, energy costs, lager, sports bras and even antibacterial surface wipes.

However, it’s unlikely your spending will exactly match this basket of goods, and so your personal rate of inflation may be different to the ONS’s rate. For example, if you live in a larger house and use more energy to keep it warm, your personal inflation rate might be higher than the ONS’s because you use more gas or electricity.

Similarly, if you drive a lot, the soaring cost of petrol and diesel could mean your inflation rate is higher.

The good news is that by working out your personal rate, you could adjust your spending to help mitigate the effects of inflation on your wealth.

To do this, add up your current monthly expenditure and compare it to previous years. This means that if you spent £4,600 in March 2022 and £4,000 in March 2021, your personal inflation rate increased by 15% in the year between. Always include regular outgoings, not one-off expenditure.

Understanding your personal inflation rate could help you to adjust your spending to mitigate its effects on your household finances. Furthermore, it allows you to better understand how significantly the rising cost of living is devaluing your money in real terms, especially if it is in savings.

This is something we will look at more closely now.

Inflation-proofing your money by investing it might be a shrewd move

According to Moneyfacts, the top easy access savings account offered 1.52% interest on 16 June 2022, with the top five-year fixed rate offering 3.0%. As you can see, both these rates are significantly below the rate of inflation, which means that your money is not keeping pace with the rising cost of living.

As a result, your wealth is likely to be shrinking in value in real terms. However, one way you could potentially inflation-proof your money is to consider investing it.

This is because it could expose your cash to greater growth potential over the long term, and help it keep pace with the rising cost of living. To demonstrate this consider the following illustration, which shows the performance of the FTSE 100 between June 2002 and June 2022.

The index tracks the performance of the top 100 companies listed on the London Stock Exchange.

Source: London Stock Exchange

As you can see, while there were downturns, the index has tended to produce positive returns over the last two decades, even with Brexit, the Covid pandemic and economic uncertainty. This means that even if investments do not keep pace with inflation in the short term due to Covid and the war in Ukraine, they may still inflation-proof your money over the long term.

Always remember though, that past performance is no guarantee of future performance.

Get in touch

Even if your personal inflation rate is higher than the ONS’s average, you may still be able to inflation-proof your money.

While it’s likely we have already discussed ways you could do this, if you would like to discuss it further or have friends and family you feel could benefit from our help, please email us at or call 01277 350560.

Please note

This article is for information only. Please do not act based on anything you might read in this article.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.