Inflation is the process of prices increasing over time and is one of the most important concepts to understand when looking at your personal finances.
Rising inflation will mean you can buy less and less with your salary, and knowing exactly how you are being affected means you can adjust your finances accordingly.
Inflation at 3% annually means the overall level of prices in the economy has increased by 3% on average, across all goods and services.
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But everybody has different spending habits. Your personal inflation rate will likely differ from the national inflation rate: if you do not eat apples then rising apple prices will not affect you, for example.
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That is why it can be useful to calculate your own personal inflation rate and see how much your own spending is affected by the overall inflation rate in the UK.
What is a personal inflation rate?
The ONS calculates the overall inflation level in the UK by purchasing the same “basket of goods” every month from different retailers all across the country and working out the average price that the basket costs in the UK.
The basket of goods includes things like eggs, flour, energy, nursing home costs, VR headsets, vinyl records and much more. The basket is updated each year to make sure it accurately reflects what consumers are buying.
The ONS then compares the price of the basket that month to its price a year ago, expressing the change as a percentage. This is the inflation rate.
However, few households will buy the exact same products as the ONS, meaning you may experience price changes higher or lower than the headline rate.
That is why it can be useful to calculate your own personal inflation rate – a measure of how much the goods and services that you consume have changed over a period of time, while excluding price increases for things you do not spend your money on.
This may end up being very different to the ONS’s level, so calculating it can be a good way to find out how inflation is actually affecting you.
How do I calculate my personal inflation rate?
You can calculate your personal inflation rate in a similar way to how the ONS calculates the overall rate of inflation.
You should run through your receipts and bank statements to work out the types of things you regularly buy and then create your own basket of goods and services, noting down the price of this.
Once you have a personal basket of goods, you can track the price of it every month when you go shopping.
If you compare this to your expenditure in the same month a year ago (and your spending habits were roughly the same), the difference between the two figures will give you a rough idea of how much prices have gone up or down.
You should make sure you eliminate any factors that could skew your data. For example, you should strip out any expensive one-off payments and make sure you are buying the same brands from the same supermarket or shop.
You should also account for any month-to-month lifestyle changes too. For example, if you hosted a dinner party one month but mostly cooked for yourself in the equivalent month a year later, it’s likely that this cost will distort your food spending figures and make them less comparable.
If you don’t want to do the calculations yourself, it might be easier to use the personal inflation calculator provided by the ONS. This asks you a series of questions, such as:
- What is your current housing situation (e.g. repaying a mortgage or renting)?
- What is your household income?
- How much does your household spend on food and drink?
- How much do you spend on energy bills?
The tool is interactive. Once you have entered your information, it will automatically calculate your personal inflation rate.
Knowing your inflation rate isn’t just a matter of idle curiosity. Noting areas where your budget is seeing big increases can help you make changes, where required.
Finding out your monthly food bill has gone up by over £50 compared to a year ago could be just the incentive you need to switch to a cheaper supermarket.
