Inflation is making everything more expensive
If you manage a budget, you’ll be all too aware that the cost of things tends to go up over time – that’s inflation for you. There are many contributing factors, but a key one is that the cost of the things we buy tends to go up because the cost of making and delivering them also goes up. Wages, raw materials and energy all contribute to increasing manufacturing costs which are passed on to consumers. Even services like insurance can contribute to inflation, as premiums rise.
It’s reported year-on-year
Inflation measures how quickly prices are rising from one year to the next, so inflation figures are always presented as an annual percentage change – e.g. if inflation is at 3%, it means that on average things are about 3% more expensive than they were at the same time last year. You might not notice such small changes from one year to the next, but over time they add up.
There are two official inflation figures
Somewhat confusingly, there are two official inflation figures, the Consumer Price Index (CPI) and the Retail Price Index (RPI), both worked out by totting up the prices of an imaginary basket of goods and services we consumers typically spend our money on, like food and clothes, but also cars, travel and even debt. The only significant difference between CPI and RPI is that the latter includes mortgage interest payments, which is why the RPI tends to be about 1% higher (ONS 2013). The one everyone tends to use for the ‘official’ (or headline) rate of inflation is the CPI.
It’s somewhat unpredictable
From mid-2016, inflation was making steady but significant upward movements, leading to predictions that it could reach 4% or higher. It’s impossible to say where it might settle, if at all, but it’s likely to remain bad news for most of us for a long time to come.
It affects the value of your savings
If your current savings rate is below the level of inflation, your cash savings are slowly losing value in real terms, reducing their ‘spending power’. If inflation is running at 3%, £100 will be worth 3% less in 12 months’ time (i.e. £97). Remember though, an emergency cash fund that you can access quickly is important for those unexpected expenses. Check out our blog if you'd like to find out more about how inflation can affect your savings.
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The comments and opinions expressed in this article are the author's own and should not be taken as financial advice from Wealthify.