Where is your money going?

Post by Mearns & Company in News

Inflation is everywhere, but your experience of it may not match with the figures in the headlines.

In 2022 four main measures of inflation published by the Office for National Statistics (ONS) ranged from 9,2% to 13.4%, with the most used, the Consumer Prices Index (CPI) registering at 10.5%.

That inflation is not a single figure or even a narrow range of numbers is further illustrated by a breakdown of the 2022 inflation rate into each of the dozen categories which make up the CPI, shown below. Predictably the highest rate of inflation was in the category including electricity (up 65.4%) and gas (up 128.9%).

The ONS, which reviews the contents of the CPI ‘shopping basket’ each coming year, gave electricity and gas a combined 2022 weighting of 3.6% of overall household expenditure. That low percentage reflects the timing of world events: the basket weightings were set before Ukraine was invaded.

If you are retired or work from home, utility bills will impact your finances more than if an employer provides a warm working environment. Similarly, lower earners are likely to spend more of their income on the essentials, like home heating and food (the second highest inflation category in 2022).

Source: ONS

The Spring Budget projected that CPI would drop to 2.9% by the end of the year. However, as 2022 and February’s surprisingly high inflation figure both remind us, forecasts from even the most respected sources are not the same as outcomes.

The CPI in December 2022 was 17.6% higher than in January 2020. After such a spike, a review of your personal finances to see whether any adjustments are needed makes good sense. For example, funding plans for school/university fees, potential inheritance tax liabilities or even that retirement world cruise may now be inadequate. Remember, just because the future rate of inflation looks set to drop does not mean the cumulative damage caused by past inflation will disappear.

The Financial Conduct Authority does not regulate tax advice. Tax treatment varies according to individual circumstances and is subject to change.

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