Don’t Get Caught Out By Inflation

Volatile economics and rapidly changing world markets have an impact on family finances. The complex web of interconnected monetary interests, paired with the consumer behaviour driving spending trends, results in a wild ride, at times, sending economic indicators in every direction. Among the figures analysts consider when evaluating economic health, inflation is an important economic force for legislators and regulators to consider. And you’d do well keeping track of it on a personal level, because inflation may pose a genuine threat to your financial stability.

Inflation Close to Home

Inflation exerts widespread influence over individual and collective domestic financial affairs. By definition, inflation refers to the rate at which prices rise on goods and services. It is a valuable economic indicator for measuring financial health; because the metric draws a direct correlation between the money in consumers’ pockets and their ability to buy things they need.

High inflation does not bode well for UK families – particularly those experiencing financial hardship. Money does not go as far and a prolonged period of inflation ripples throughout the overall economy, affecting the standard of living in UK households. When rising prices leave families short, online lenders offer quick cash solutions, providing fast payday loans. In cases when personal wages don’t keep up with the national rate of inflation, the Bank of England steps in with base rate adjustments to curb price increases.

Inflation and hyperinflation occur under certain economic conditions, when the price of goods and services rise briskly or at a faster rate than wages increase. The phenomenon is felt close to home, because many UK families are already straining to stretch their earnings. Inflation adds another layer of difficulty, impacting the price of widespread necessities, from mortgage finance to rail tickets.

Stated simply, an annual rate of inflation such as 3 per cent represents the increased amount you’ll pay for consumer goods today, compared to their price twelve months ago.

Measuring Inflation

Recognising inflation isn’t difficult at home, where higher prices decrease your spending power. On a national scale, the office of National Statistics (ONS) is responsible for measuring inflation. The organisation uses a few basic tools to estimate the rate of inflation.

  • Consumer Price Index (CPI)
  • Retail Price Index (RPI)
  • Consumer Price Index with owner-occupied housing costs included (CPIH)

These three main metrics help economic analysts understand how various sectors perform and how they are interacting within the economy. For example, the most commonly cited statistic, CPI, accounts for prices in a wide cross-section of consumer classes, including grocery items, electronics, entertainment, sports equipment and consumer goods in dozens of additional spending categories. Analysing the information illuminates price trends, which ultimately helps determined what the inflation rate is. The complex calculations behind the rate use a weighted system to derive inflation growth rates, assigning greater importance to the things on which consumers spend the most money.

CPIH is a reasonably comprehensive measure that not only tallies price increases in general consumer categories, but also accounts for some of the costs of home ownership.

Small amounts of inflation are thought to be good for the economy, because a little inflation encourages UK consumers to buy things sooner and stimulates employers to put up wages. Both of these are good signs for the economy, so central banks such as BoE typically target inflation rates around 2-2.5 per cent. When forecasts veer from the desired level, the Bank of England and other central authorities adjust their banking base rates, attempting to manipulate markets, in response.

The UK currently aims for 2 per cent inflation; the figure measured 2.1 per cent in July.

National inflation statistics provide a general reference for the country, but inflation has unique effects on each household. Whilst inflation prevails, borrowers may benefit, effectively reducing mortgage debt. Yet at the same time, savers facing inflation typically find it harder to get ahead. Though you can’t do much about inflation, staying informed about price trends can prevent you from getting caught out when your buying power takes a hit.

Paul graduated in 2001 with a degree in Finance. Since then he has gone on to work for several of the UK's most well-known financial institutions.

An avid blogger and a huge football fan, Paul is here to guide you through the ins and outs of personal finance and perhaps save you some money in the process!

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