The announcement that inflation has risen above 10% will be a concern for many people say the Office for National Statistics (ONS). Jane Newman, Managing Director of Jane Newman Financial Service Ltd, explains what this means for us.
What is Inflation?
Inflation is the increase of the level of prices of the goods and services that households buy, this includes mortgages, food, fuel, clothes and transport. It also influences pensions. As inflation rises it reduces the buying capability for people.
The increasing cost of food and services has caused the Consumer Price Index (CPI) to rise into double figures for the second time this year after it hit 10.1 per cent in July. We have not seen such a high rise since February 1982 and according to the Bank of England, for most of the last 20 years, inflation has generally increased by 2%.
The Consumer Price Index is an important metric that tracks the average change in prices paid by consumers over a certain period of time for a basket of goods.
What are the main contributors to high prices?
According to the ONS, rising food and non-alcoholic drinks prices have made the largest contribution to the change in the CPI between September and August.
The largest upwards effect from food prices came from bread and cereals, meat, milk, cheese and eggs.
Although petrol prices have been reduced by around 4% over the month the biggest contributor to the annual CPI rate for the year to September 2022 is housing and household services. These include owner occupiers’ housing costs, private rents, and electricity, gas and other fuels.
Although the fall in petrol is a positive change, transport costs are still 10.6% higher than they were in September last year.
Why is the inflation figure important?
Inflation affects all aspects of our economy such as consumer spending, business investments and employment rates. The recent September inflation announcement is important as it is used by the Government each year to make several key policy decisions.
The Department for Work and Pensions will use the CPI figure when deciding whether benefits should be uprated in line with inflation when the next financial year begins in April 2023. If they do, the benefit payments will rise by 10.1%.
It is also used by the Department for Work and Pensions within the triple-lock pension commitment. Triple lock pensions mean that state pension payments rise by whatever is higher – inflation, average earnings or 2.5%.
What does rising inflation mean for you?
As rising costs of goods and services that you need to live on continue to increase, your pay will not go as far as it used to especially if your salary has not kept up with inflation.
With careful financial planning, you can reduce the risk of your money’s purchasing power being eroded.
Inflation changes from year to year and month to month so it is important to ensure that your savings remain above the cost of inflation.
When arranging your pension, inflation should be taken into consideration. If you need £500,000 to live on when you retire in 20 years’ time, you need to make certain that this will be enough as the rise in inflation could mean that amount of money won’t go as far in 20 years as it does today.
Next steps.
If you are concerned about the rising cost of inflation, please come and speak to us, we are here to help you to achieve your financial goals. Contact info@janenewmanfp.co.uk to arrange a meeting.