In June, the Office for National Statistics (ONS) announced that inflation in the 12 months to May 2023 was 8.7%, a figure unchanged from April. This led to concerns that inflation was not falling as quickly as hoped, with the Bank of England responding by raising the base rate to 5%, the 13th consecutive increase since March 2020. 

Meanwhile, in the latest release in July, ONS figures showed inflation to have reached 7.9% in the 12 months to June 2023, lower than before but still historically fairly high. 

Inflation is a concern for all individuals, as it represents the increasing cost of goods and services year-on-year. As a result, if your savings or investments are not keeping pace, your money is essentially losing value in real terms, because it will theoretically not be able to go as far as it did in the previous year.

However, it is important to be aware that the inflation figure you see in the headlines does not necessarily mean anything to you as an individual. 

That is because this number represents a broad average based on a set number of goods and services. If these are not relevant to you and your spending, then the headline figure will mean very little to you as a result.

What you really need to know is your personal inflation rate. Read on to find out why, how to calculate yours, and what you can do to try and inflation-proof your wealth.

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

There are various methods of calculating the rate of inflation, but the one you will generally see in news headlines comes from changes in the Consumer Prices Index (CPI).

The CPI is a “basket” of commonly bought household goods and services. It comprises more than 700 different products across various categories, with the ONS recording the largest five in February 2023 to be:

  • Housing and household services (30.3%)
  • Recreation and culture (11.2%)
  • Restaurants and hotels (11.2%)
  • Transport (11.1%)
  • Food and non-alcoholic beverages (9.6%).

To create the inflation figure you see in the headlines, the ONS records the prices of these various products and services in one year, and then does so again 12 months later to see how they have changed.

By aggregating this data into a single figure, it gives a broad overview of how quickly prices are increasing.

The CPI may not reflect your personal spending habits 

However, the reason that this might not necessarily be relevant to you is because your individual inflation rate will depend on what you buy from the CPI basket.

Consider the “recreation and culture” category, the joint second-largest weighted category in the latest set of CPI data. This is a broad category, encompassing everything from televisions, portable speakers, and headphones, to other “major durables” such as caravans, boats, and water sports equipment.

You are relatively unlikely to buy these items more than once every two or three years, let alone every year. As a result, while it makes sense for them to be included in the CPI calculation, annual price changes in them might not reflect your personal spending power.

Meanwhile, even the “food and non-alcoholic beverages” category may not entirely apply to you. For example, meat makes up a significant part of this, but if you follow a vegetarian diet then changes in the cost of these products will mean very little to you.

How to calculate your personal inflation rate

All in all, this shows the importance of calculating your personal inflation rate, so that you can accurately see how your wealth may be affected by rising prices.

You can calculate your personal inflation rate by following these four simple steps:

  1. Looking back to June 2022, add up your regular expenses, including food shopping, household bills, leisure activities, and anywhere else you regularly spend money.
  2. Do the same for your regular expenses in June 2023.
  3. Subtract your 2022 figure from your 2023 total.
  4. Divide the difference between the two figures by your total expenses in 2022, and then multiply the result by 100.

This should give you a percentage figure that represents your personal inflation rate. It may be similar to the ONS figure, or it could be entirely different. Either way, it should give you a far more accurate picture of how your money is affected by rising prices.

Investing your wealth could help your money withstand the eroding effect of inflation

Of course, knowing your personal inflation rate is just half the battle. If yours is higher than you thought it might be, you may be looking for ways to ensure that your money remains ahead of the rising cost of living.

Perhaps the most well-known method of doing so is through investing your wealth. By placing your money into a variety of assets on the stock market, you may be able to generate returns that outpace inflation.

As data published in the Times Money Mentor shows, the average annual return of the FTSE 100 over the past 30 years was 7.3% (assuming dividends are reinvested). This compares to an average annual inflation rate of 2.1% over the same period.

While past performance is not necessarily an indicator of future performance, this does show that investing could help to keep your wealth ahead of rising prices, so it maintains its spending power over time.

Get in touch

Need help protecting your wealth against inflation? Get in touch with us at DBL Asset Management.

Email or call 01625 529 499 to speak to us today.

Please note

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investment 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.