The headline rate of inflation, as measured by the Consumer Prices Index (CPI) was back up to a 40 year high of 10.1% in September, according to the latest data from the Office for National Statistics (ONS).
CPI gives us a good indication of how much more expensive the items we buy every day are becoming – and 10.1% is hefty. If the cost of a selection of items cost you £1,000 last year, this year you need to find an extra £101 to afford exactly the same things.
And, if you think that if you have your cash in savings earning even the best 1-year fixed rate of 4.60% - that £1,000 would only earn £46 of the extra £101 you need. Which is why high inflation is such a dangerous situation for many people – especially those who have no way to earn more by working more.
Once again it is soaring food prices which has caused much of the damage, rising by over 14% in the 12 months to September 2022 – and we are now facing food prices that are the highest seen in decades. This has more than wiped out the fact that fuel prices at the petrol pump had fallen – it seems there’s simply no respite.
Whilst the items affected the most include some of the lowest cost things, such as bread, eggs and milk – these are staple items that we all need. And once again it is the lowest earners that will feel the effect the most.
Why is the CPI rate in September important?
The September inflation rate is important for pensioners in another key way, as it is normally used to determine the rise in the State Pension each year. You may remember that last year the government scrapped the State Pension ‘triple lock guarantee’ - wages inflation was ignored, as it was the highest of the three measures used to decide how much the State Pension should be hiked. As a result the State Pension benefit rose by less than it should have. For more about the triple lock and whether it’s likely to stay this time around, take a look at TPO’s article here.
What is core inflation and why is it important?
While many of us will be more familiar with CPI which is calculated based on an average basket of goods that we use, including essential items such as food and energy bills, there is another inflation index that is closely monitored by the Bank or England’s Monetary Policy Committee (MPC) known as core inflation.
Core inflation is a complementary measure of consumer price inflation, which looks specifically at the underlying rate of inflation, so excludes items that are subject to erratic and seasonal price movements, or temporary supply shocks. For example, the costs of food and energy are currently seeing so much volatility and therefore can often ‘skew’ the larger headline inflation rate.
As the former vice-chair of the Federal Reserve Board Alan Blinder stated "The name of the game then was distinguishing the signal from the noise, which was often difficult. The key question on my mind was, typically, what part of each monthly observation on inflation is durable, and what part is fleeting?"
Interest in core inflation measures by the central banks typically increases during periods of high inflation volatility. However, as core inflation excludes or down weights items that are typically volatile but are important to the public, such as energy and food prices, it is not really representative for the man on the street. But core inflation measures may provide a useful complementary insight into inflation developments, and so are useful for policy makers.
So, what happened to the core inflation figure in the 12 months to September 2022? Well it too has increased, to 6.5% up from 6.3% in August, which illustrates that it’s not just food and energy cost inflation that is pushing up the cost of living.
Of course neither CPI or core inflation or any of the other measures of inflation are as important as our actual personal rate of inflation – which will vary dependent of our lifestyle. But as mentioned above, with the cost of key staple items increasing faster than they have in many years, it’s important to do what you can to try and minimise its effect.
As our calculator below shows, if you leave your cash sitting in your current account, with inflation at the level it is today, it will be rapidly eroded. The spending power of a deposit of £50,000 left in a current account earning no interest, would reduce to just £45,413 in real terms after a year if inflation were to remain it its current level of 10.1%
Even if you moved that cash into the best paying easy access account paying 2.81%, while it will erode a little slower, after a year the spending power of that £50,000 would still have reduced to £46,689 even though the actual balance would have increaed to £51,405 inluding interest.
Of course, if you’re worried about rising inflation and think you might be holding too much in cash, there may be other options. Perhaps you'd like to explore these, so why not get in touch. We’re currently offering all those with £100,000 or more in savings, investments or pensions a FREE financial planning review with one of our TPO colleagues, worth £500. You can find out more here.
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