Edward Smith, co-chief investment officer at Rathbones, explains what it is and why it matters
Last month, anti-poverty campaigner Jack Monroe sparked change by highlighting huge price increases on food that far exceeded the Office for National Statistics’ inflation figure of 5.4%; the cost of living crisis, it seems, is hitting low-income Britons the hardest. The ONS responded by saying it accepted that everyone has their own “personal inflation” rate. But what affects our rate, and why does it matter? I asked Edward Smith, co-chief investment officer at Rathbones, a wealth management firm which offers a free-to-use personal inflation calculator.
I’d never heard of a personal inflation rate before. Why are we talking about it now?
For the last 25 years, inflation has been stable. But now we’re back to a rate we haven’t seen since the 90s. It’s probably going to get up to 7.5%, possibly 8%, come April.
Oof! All this because of energy prices?
Not entirely. Energy prices accounted for about six-tenths of the overall increase last year, but there’s also Covid. We’re spending more on goods than services, and that demand butted up against supply-chain disruptions. The good news is we think spending habits are likely to normalise, and we expect it to be back at 2% by next year.
Hmm, I’m not sure. It sounds like inflation spikes when disaster strikes, and with the climate crisis there are plenty of those coming.
Yes. Some of the areas most affected by climate disasters are in our supply chains, such as Asia. Though there are some people who say the rising energy costs are due to Europe going down the green route too quickly and failing to consider the impact of a relatively windless summer, like last year’s.
So how long have the ONS averages on inflation been problematic?
I wouldn’t say they have been. The ONS has always been clear that the number it produces is an average for the whole country, and over the past 20 years the rates haven’t been all that different between groups. We’re talking about a few tenths of a per cent between lower earners – who tend to be younger, without property wealth – versus higher earners. One of the reasons we have the personal inflation calculator is because you may have a few years when you’re spending more on something: medical care for a loved one, say. And inflation is an important part of planning. Say you save £100 a month for 20 years; if the rate of inflation was 2%, then your £24k savings would be worth about £16k in inflation-adjusted terms. But if 2% wasn’t representative for you and your rate was more like 3%, then your savings would be worth only about £13k. That’s massive.
The ONS says it’s working on capturing the rates across different groups – how?
By using a big-data approach, where it takes all the transaction data from supermarkets instead of using a sample of prices through surveys.
That sounds like a data-protection nightmare.
It’s all anonymised!
Hope so – I prefer to keep my prosecco-purchasing habits out of any official roster. We talked about 2% being a “good” amount of inflation; why not 0%?
Because if inflation is too low, people may be put off spending, thinking prices are going to get even lower. That means companies making fewer sales, and job losses. Ultimately, the cost to society of 1-2% of deflation is much greater than the cost of 1-2% inflation. Though I’d like the price of my prosecco to stay the same.
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