Image credit: Flickr/THEMACGIRL*
Today’s announcement by the Office of National Statistics of a change to the current contents of their “basket” of goods, used to calculate inflation, highlights the nonsense that surrounds inflation calculations. Naturally, the basket is supposed to represent the “typical” consumer, and contains around 700 items. Our clients are principally at or in retirement, and whilst they may have tablet computers (just added), most won’t read teenage fiction, for example the Twilight series!
More generally, the things pensioners spend money on will depend on their wealth. It may sound obvious, but our experience is the wealthy spend more on luxury items, for example holidays, cars and electronic goods (which have experienced more modest price increases), where the less wealthy spend a greater proportion of their net income on essential items, for example gas, electricity, fuel and food, which have increased more rapidly.
To calculate your personal rate of inflation, a good method is to run a budget, and to compare what was spent last year with this year, checking where needed with bank statement entries. Through this exercise we find that many clients have seen increases in their expenditure of around 10% – more than double the current retail and consumer price index increases. Alternatively, the Office of National Statistics have a “Personal Inflation Calculator” which may give an estimate of more personal spending increases.
Like all measures of inflation, all of the above is historic, and may not be repeated in the future. In providing a financial plan for our clients we explain the implications of many possible scenarios, to highlight the impact of our assumptions on their financial objectives. Due to the uncertainty of inflation we will often be asked to assume the implications of inflation being consistently higher than ‘normal’ assumptions; remember the Bank of England have maintained for fifteen years that their long-term inflation target has been 2-2.5%,yet inflation has been consistently higher for a number of years now.