Inflation – The Race Against Time

The Monetary Policy Committee of the Bank of England is tasked with keeping inflation at exactly 2%. If inflation moves more than 1% away from this target (up or down), then the governor of the Bank of England has to write an open letter to the Chancellor of the Exchequer, explaining why this has happened and what the MPC intends to do about it.

Inflation – theory and practice There are various ways to measure inflation and the one used by the MPC is known as the Consumer Price Index. Basically this approach creates a theoretical “shopping basket” of goods a hypothetical “average consumer” would be likely to buy. It then measures the movement in prices of these goods. As can be clearly seen therefore, whether or not any given private individual agrees with the MPC’s views on inflation will depend very much on the extent to which their shopping patterns match the MPC’s imaginary shopping basket.

The importance of understanding “personal inflation” Averages have their uses, but the reality is that we are all individuals in widely different circumstances and hence it is pretty much inevitable that there is going to be some degree of discrepancy between the MPC’s “theoretical” inflation rate and the rate of inflation felt by any given person. Some people may be lucky enough to find themselves “winners”, for example if they are able to grow their own food at a time when food products are experiencing high inflation, then their personal rate of inflation will be lower than the MPC’s rate. Some people, however, may be “losers” and find that the rate of inflation they experience is higher than the MPC’s rate. One situation where this may happen is when a person has a low disposable income and hence makes fewer discretionary purchases. If low inflation on discretionary items is counterbalancing high inflation on necessary purchases then people who are only buying necessary items are going to find that their personal experience of inflation is much higher than the MPC thinks it should be.

Managing high personal inflation If you are already in a situation where your personal inflation level is higher than the MPC says it should be, then there are basically two approaches you can take. One is to try to increase your effective income and the other is to try to save money. Of course, you can try to put both approaches together for maximum impact. While increasing your income may seem unrealistic, the digital “gig” economy has opened up a wide variety of ways for people to earn a little extra money, which may go a long way to helping you feel more comfortable. Likewise, saving money can be about more than cutting back on what you buy (although that can be a part of it), it can be about being more astute about what you buy, when and how. For example, could you team up with other people you know to shop in real bulk for the best deals? This may take a little organisation, but could lead to real savings.

Inflation and retirement Inflation will be a fact of life in your retirement, which means it really pays to plan ahead so that you can have a reasonable degree of assurance that your retirement income will at least keep pace with it, particularly since the “Triple Lock” guarantee (that pensions would rise by the lowest of average earnings, inflation or 2.5% was a 2015 pledge for the duration of that parliament. There has been a conspicuous absence of a pledge to keep this guarantee for the duration of the next parliament, let alone beyond. Hence, private individuals would be well advised to do everything they can to ensure that their retirement funds can stand the test of time, which means standing the test of inflation.