What is inflation and how will it affect me?

What is inflation?

Is it just me or at the minute, every time you open a paper or switch on the TV; it feels like everyone is talking about inflation, fuel costs or the next big money crisis. Inflation is at its highest level in forty years and according to the Office for National Statistics, it rose to 9% in March 2022*.

But, these figures are just numbers and unless you are in the know (or a diligent shopper) it’s easy to bury your head in the sand and just hope that it doesn’t impact you. Unfortunately, it probably does and so for this month’s blog, I thought that I would try to bring the worries around inflation to life and offer some minor spending tweaks that could get you back on track.

*Source dataset: Consumer price inflation time series (www.ons.gov.uk/economy/inflationandpriceindices/timeseries/d7g7/mm23), published 18/05/2022.

Inflation is the term that refers to the increase in the cost of an item you want to buy. For example, in January 2022, I paid £45.00 to fill my car up with petrol and this morning it costs me an eye-watering £55.00. Thankfully, my car has a relatively small tank but that’s still a 19% increase in a mere five months!

In theory, inflation is a healthy thing for the UK economy – when it’s under control. Governments try to avoid having a stagnant economy so in an ideal world they aim for around 2% a year. Of course, inflation is not all bad as it helps to increase salaries and also benefits those with fixed debts, but for those with savings and fixed incomes, it can be a challenge. With the inflation rate in the UK being a hefty 9%, it naturally causes some concern, particularly given that most people will not have seen a salary increase of 9%, but, in fact, quite the opposite.

What is causing inflation?

The recent changes to National Insurance contributions for those that are employed and the removal of the triple lock for pensioners have resulted in some people receiving less income. Food, fuel, gas and electricity prices have all crept up, so what you have left at the end of the month (if anything) will be far less.

If you add in Brexit, Covid, supply chain bottlenecks and rising consumer demand then we face a perfect storm for your purse or wallet. Add to this, low-interest rates on the cash you have in the bank or building society and your day-to-day money will feel the pinch.

For most, the money you have set aside for the future will also be going backwards.

Putting things into perspective and at risk of sounding like my nan… when I was a girl a loaf of bread used to cost 25½p (Yes I am old enough to remember half pennies, but only just!). So if we trotted down to the supermarket in 1979 we could have just about afforded four loaves of bread with a single pound. At my local supermarket this morning, a loaf of own-brand white bread would have set me back 65p, so with my same pound coin I can only afford one loaf and don’t even get me started on the price of wine!

The same applies to the money you have in the bank. If you have £1000 in your savings/current account and it’s earning you 1%, but inflation is at 9%, you are in fact losing money. You will still have your £1000 at the end of the year, but what you afford to buy with it at the end of the year will be less if inflation continues at 9%.

The laws of shrinkflation

If we harp back to my childhood one more time you can also see the concept of shrinkflation. Nope, I have not been making up words again, but, I bet every reader will have encountered this but assumed it was a trick of the mind.

How many times have you treated yourself to a packet of crisps, sweets or chocolate, got the packet home, opened it and commented something along the lines of “I remember the packets being bigger when I was young!”? If I had a pound for every time I had said this, I would be a very rich lady. This phenomenon is no trick of the mind either and it is in fact more likely to be shrinkflation.

Shrinkflation is when a company chooses not to increase the price of their item and risks the buyer seeing the item as a luxury or selecting something cheaper. Instead, they keep the price the same but might reduce the quantity or weight. Crisps are a great example of this, by keeping the bag the same size it has always been, as a consumer you’ll purchase as normal.

Unless you are exceptionally vigilant at reading the label, this slight weight change will likely go unnoticed until you open the packet and remember the good old days of “normal” packets.

So the questions we typically get asked are… how long will it last? And can we do anything about it? I am certainly not an economist, so I can’t begin to predict how long, but as a Financial Adviser, I tend to plan for the worst and hope for the best.

Avoiding the impact of inflation is nigh-on-impossible at the moment, as we are seeing increases in many aspects of our daily lives. A quick search of the internet will provide an array of money-saving ideas, from food shopping on a budget to how to entertain the kids during the summer holidays for free – so I won’t spend hours on money-saving ideas.

Here are just some of the money-saving tips that we talk to our clients about…

As a Financial Adviser, I love a good spreadsheet and particularly a budget planner. Everyone seems to hate them, but actually, it will tell you an awful lot about what you spend your money on and more importantly; areas when where you can cut costs. The obvious ones are food and fuel but the other items to look out for are those Internet spends on random things that you can probably live without. Think twice about sneaky subscriptions too, which may go relatively unnoticed because on the face of it, they are relatively cheap, but given the vast array of streaming services available, all offer something different. It’s very easy to have a few on the go at once. These soon stack up and often are not used as regularly as you think. Beauty subscriptions may seem like a great idea too but have your supplier changed their products or have you seen shrinkflation? Are they still good value for money?

It would be remiss of me not to talk about ways to reduce heating your home given the cost of energy. Whilst we Yorkshire folk are pretty hardy and tend to stick another jumper on, always have our big coats ready for the winter and try to drag out switching on the heating until October (preferably December). We invariably will have to give in especially if we are on our own at home. Heat yourself and not the room that you are in, whether it be an extra jumper, a heated blanket or a hot water bottle. The cost savings are significant in comparison to heating the whole house. It’s also a good plan to consider your energy efficiency. If your house looks like Blackpool illuminations all of the time, then there are no doubt some additional savings to be made.

Perhaps the biggest one to consider whilst it’s great to make savings on heating and your monthly budget, as I have already explained. If your cash in the bank is going backwards in low-paying accounts, it’s not only today’s spare cash that is impacted but also your future plans. Reviewing your savings and looking for alternative options to increase your returns will certainly help to reduce the impact of inflation over the longer term.

Lifestyle creep can eat away at your long-term saving plans, and in today’s society, it can be hard to avoid. Check out Caroline’s latest blog on the topic, and learn how to avoid the slippery slope of spending more than you need here.

For more help and advice or to receive a complimentary guide covering wealth management, contact us at Yorkshire Financial Planning at 01482 275540 or complete our contact form here.