How to calculate your personal inflation rate

In the past few weeks, you can’t have missed headlines that the UK is experiencing the highest inflation in 40 years. According to data from the Office for National Statistics (ONS), prices rose by 9% in the year to April 2022.

Steep rises in the cost of living are primarily being driven by the rising cost of food and the impact of Russia’s invasion of Ukraine on energy prices and global supply chains.

While you’re likely to have seen increases in the cost of the things you buy, the price of some goods and services is rising quicker than others.

Kantar research published by iNews says that the average price of dog food is almost 17% higher now than it was at this time last year, while savoury snacks have increased in price by more than 11%.

As the price of different goods and services are rising at different rates, your own “personal inflation rate” could be different to the official rate. Read on to find out more about how to calculate your personal inflation rate, and how it could affect your lifestyle.

Inflation erodes the buying power of your money over time

To put it simply, inflation is a measure of how prices change over time. Typically, a small amount of inflation – which is why the Bank of England (BoE) targets a rate of 2% each year – can be a good thing, as it helps to keep the wheels of the economy turning.

However, high inflation can cause problems. For example, if your wealth doesn’t grow in line with the rate of inflation, it can lose its value in real terms as the buying power of your money is eroded.

The BoE’s inflation calculator can be a useful tool to see how even relatively low rates of inflation can have a significant impact over time.

According to the calculator, in 2021 it would have cost you £1,296 to buy the same goods and services that cost £1,000 in 2011. That’s due to an average annual inflation rate of 2.6% over that period.

Your own spending habits influence your personal inflation rate

Currently, the ONS calculates the rate of inflation using around 180,000 separate price quotations covering around 730 representative consumer goods and services.

These goods and services include everything from food to furniture and the ONS updates them regularly as trends evolve. For instance, meat-free sausages, sports bras, and antibacterial surface wipes have replaced doughnuts, men’s suits, and coal in 2022.

While the average rate of inflation might be 9%, your personal inflation rate could be very different to this, depending on what you buy.

For example, 2021 research published by the Telegraph shows that the cost of a private education has risen by almost 50% over the past 10 years, bringing the average fee for a day pupil up to £14,289 a year.

So, if you have a child or grandchild in private education, your personal inflation rate may be higher than the official rate.

Similarly, if you enjoy eating out or going on UK breaks, then inflation may affect you more significantly. That’s because, as the ONS report, the prices of restaurants and hotels rose, overall, by 2% between February and March 2022, the largest change between these months since records began in 1988.

Furthermore, Sky News recently reported that the average cost of filling up a family car had reached £100 for the first time. So, if you do a lot of driving – perhaps you travel to care for an older relative? – then you may find your personal inflation rate is in double figures already.

Calculate your own personal inflation rate

Calculating your own personal inflation rate involves comparing your expenses to last year’s.

  • Work out what you spent on food, housing, utility bills, fuel, entertainment, clothing, education, and other items in May 2022
  • Use your bank statements to work out the same expenditure in May 2021
  • Make sure you include regular expenses rather than one-off costs
  • Subtract your total spending for May 2021 from May 2022
  • Divide that difference by your monthly expenses for May 2021.

The result is your personal inflation rate.

Knowing this can help you to plan your finances

Knowing your personal inflation rate can be instructive in helping you to plan your finances.

For example, if you’re approaching retirement, knowing your own rate will help you to identify how much additional income you’re likely to need to draw year-on-year. This makes it less likely that you will run out of money in the future as you can more accurately plan your withdrawals.

Working with a financial planner can also add value here. Using cashflow modelling, we can use your personal inflation rate to model future scenarios to ensure that your income will be sustainable going forward.

If not, knowing your personal inflation rate can enable you to make positive decisions such as:

  • Changing your spending habits
  • Reassessing your risk tolerance
  • Increasing the amount you are saving.

Understanding your actual household spending can be extremely helpful, as you exert a level of control over some of your spending, unlike inflation, which is out of your hands.

Furthermore, you should undertake this process every year. It may be particularly important during a period of sharply rising prices – if you have a dog, you’re likely spending almost a fifth more on pet food this year than last! – but having a clear handle on your outgoings makes budgeting and planning more straightforward.

The Financial Conduct Authority does not regulate cashflow modelling.

Speak to us

If you’re worried about how high inflation could affect your finances, we can help.

Using cashflow modelling, we can look at your current and future income needs and establish how rising prices will affect you now and in years to come. Knowing you have the assets to provide the lifestyle you want can be genuinely transformative, so get in touch to find out how we can help.

Email or call 01204 300010 to speak to us today.

Please note

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.


Be the first to read our content by getting it straight to your inbox. Sign up today!

    More stories

    23 May 2022

    5 clever ways to manage surplus cash in your business

    Read more

    23 May 2022

    5 inspiring Warren Buffett quotes that can teach you about investing

    Read more