What is inflation and how can you beat it?

The latest inflation figures announced last week (16.02.22) show that the UK’s escalating cost of living is not done yet. This month, we’re diving into what inflation is, how it makes you feel the pinch, and how you can best plan to beat it – especially in retirement.


What is inflation?

Inflation is the drop in purchasing power of the £1 in your pocket. This is caused by a rise in the cost of living. To track inflation, we use the Consumer Price Index (CPI).


What is the Consumer Price Index (CPI)?

The CPI tracks the change in price for many everyday goods and services and calculates this into a single, simple number that is easy to follow. If the CPI number goes up 3%, that means the cost of living has risen 3%. Or, in other words, inflation is at 3%.

Unfortunately, right now, it’s even higher than that.


Ending the year on a high (but not a positive)

We finished up 2021 with inflation at a hefty 5.4%. In fact, inflation had not been higher in almost 30 years – since March of 1992. That is, until today’s unveiling of 5.5% inflation for January 2022.

Drastic inflation, such as that we face now, is obvious. It’s all over the news and prices of many everyday goods and services markedly and rapidly increase. But inflation is often harder to notice. When things are calmer, prices change more subtly and slowly. This can make it hard to detect that inflation is leaving your finances feeling rather… flat.


But the inflation will go down again, right?

Inflation will, yes. Your cost of living, sadly no. It will continue to rise, and here’s why.

Even when inflation is decreasing, it’s still inflation. And inflation, by any other name, is simply an increase in the cost of living. For example, inflation was 5.5% in Jan 2022 and if it falls to 4.5% by January 2023, that does not mean the cost of living is 1% cheaper. The cost of living is still increasing, but at a slightly slower rate of 4.5% instead of 5.5%.

This can be confusing, because a drop in inflation is often portrayed in the media as such a positive event you might believe the price of a Mars Bar was back to 4d.


So the cost of living never goes down?

Technically, it can. But for there to be a drop in the cost of living, inflation would need to be a ‘negative’ number – known as deflation. If you’re thinking that probably doesn’t happen very often, you’d be right. And life has certainly never gotten 5.5% cheaper!

The last time there was a hint of deflation was in April 2015, when inflation dipped to -0.1%. Before that, you need go back to March 1960, when it reached a “whopping” -0.6% and a Mars Bar really did cost about 4d.


What does inflation mean for your savings?

Nothing good. Inflation is the number one reason you should not leave your money in traditional savings accounts or cash ISAs. At the current rate, the average UK saver stands to lose almost £400 this year as banks fail to keep up with inflation – which is now over 20 times higher than the interest offered on most UK savings accounts.

Tip: Saving enough to cover 3-4 months of household outgoings in case of an emergency is advisable, but the more you “save” beyond that the harder inflation will hit you.


For example, the average easy access cash ISA offers just 0.27% interest. This leaves a massive 5.23% gap to the current rate of inflation. In real money terms, the average cash ISA saver with £8,100 in their pot is losing £394 a year against the rising cost of living.

Meanwhile, the average regular savings account contains £5,000 with a rate of 0.2% – losing UK savers £247 per year.

Tip: Investing rather than saving is the only way to beat inflation, but you should always know the risks and consider speaking to a chartered firm for reliable investment advice.


Inflation?… What’s that to do with the price of milk?

Soaring energy prices are hard to miss right now. They’re getting all the headlines. But don’t overlook how the subtle rise in price of many everyday items can pinch your pension over a 20-year retirement.

BREAD: How much bread do you get for your dough these days?

Since 2001, the average 800g loaf of sliced white bread has risen from 51p to £1.07. That’s more than double the price, meaning you get 53% less loaf for your money. The kids better eat their crusts at that price.

CHEESE: How much cheese do you get for your cheddar these days?

Between 2001 and 2020, the price of cheddar matured from £5.04 to £6.88 per kg. Meaning you now get 27% less for your money today. A loss of 270g per kg. That’s a lot of macaroni cheese you’ll be missing out on over the years.

MILK: How much milk do you get for your moo-lah these days?

Between 2000 and 2001, the price of milk has soured by 21%. So where 43.1p used to get you a full 568ml (1 pint), now you only get 448ml. It’s as if every bottle of milk you buy today is already one fifth empty. How many cuppas is that over your retirement?

And that’s just three of the countless goods and services most of us use every week of our lives. Imagine how draining rising prices could be on your finances without a plan to beat them.

How can you beat inflation?

Well, you could cut down on the cheese toasties and switch to black coffee. But that’s not much fun, is it? Inflation can be a stealthy thief. Don’t let it ruin your lifestyle today or your hard-earned retirement tomorrow.

Investing your money is your best chance to beat the rising cost of living. It’s not about taking high risks and getting rich. A cautious investment portfolio and retirement plan can often be all you need to offset the damage done by inflation throughout your life.

For investment advice and pension planning from a chartered firm you can trust, get in touch with us today.