Personal inflation rate – what is it and why does it matter?

Discover how calculating your personal inflation rate can improve financial decision making and provide insights into your real cost of living.

| 5 min read

Inflation has been one of the most talked about terms across the economy in recent years. In case you didn’t know, it measures how much the price of goods and services rise over time, for things like fuel, bread, and milk.

However, there's a concept that's often overlooked, but is just as important to managing our finances – your personal inflation rate.

Your personal inflation rate is unique to your spending habits, lifestyle, and circumstances, and it can significantly influence your financial resilience.

In this article, we'll delve into what personal inflation rate is, why it's important, and how you can manage it effectively to secure your financial future.

What is personal inflation rate?

Personal inflation rate is your very own inflation rate. It measures how much your expenses increase over time, based on your individual spending patterns and regular outgoings.

While the general inflation rate provided by the Office for National Statistics (ONS) gives an average estimate of price increases, it measures a basket of 450 everyday items - a lot of which you might not use so it’s unlikely to reflect your life.

Factors that impact your personal inflation rate

  1. Lifestyle
    Changes in your lifestyle, such as starting a family can impact your overall expenses and therefore your personal inflation rate. Costs such as energy bills can often be quoted as the ‘average household ’, which is based on 2.3 people for the UK. This figure isn’t entirely helpful if you live with your partner and two children, or if you live on your own.
  2. Spending habits
    Your spending habits and preferences play a crucial role. For example, if you regularly purchase luxury items or dine out weekly, your personal inflation rate might be higher compared to someone who prefers to cook at home or shop at highstreet stores.
  3. Location
    The cost of living varies greatly depending on where you live. Major cities generally have higher living costs than other areas. Your location can also impact your spending habits and lifestyle. For example, someone who lives in London will likely spend a greater proportion of their salary on eating and drinking out because these services are usually more expensive in larger cities.
  4. Age
    This impacts how much you spend and what you spend it on. If you’re living with your parents and all you buy is computer games and clothes, you are likely to experience a lower inflation rate.
    Young homeowners in their thirties spend more on items related to transport and housing compared to someone more senior who receives discounted public transport and is generally mortgage free. However, retirees spend a higher proportion of their income on fuel and food which have seen significant increases in the recent past.

Why does your personal inflation rate matter?

While you cannot control inflation, it’s important to understand how your expenses change over time to allow you to create an accurate view of your monthly expenditure. This is an essential part of financial planning for things such as your rainy-day cash pot for any unexpected emergencies, like job losses or healthcare costs.

A higher personal inflation rate means you’ll need to adjust your budget accordingly to ensure your income can cover your expenses. This could mean spending less on non-essential items like meals out or holidays.

Your personal inflation rate could directly impact your investment decisions, too. If your own rate is higher than the rate of return from your investment portfolio, the purchasing power of your money will be eroded over time. To avoid this, you might need to adjust your risk to achieve a better return.

How to calculate your personal inflation rate

You can calculate your personal inflation rate through the calculator on the ONS website.

This will give you a comparison between the current national inflation rate and your personal inflation rate, and what factors are driving your increased costs over the last 12 months.

Calculate your personal inflation rate

The bottom line

Your personal inflation rate is important metric that directly impacts your financial well-being.

By understanding the factors influencing it, you can plan ahead and make changes to your financial plan to achieve a greater level of financial security and stability over the long run. Regularly reviewing your expenses, budgets, and making informed investment decisions can help you secure a brighter financial future for you and your family.

Guide to preserving and protecting your wealth

If you’re concerned about the impact of inflation on the value of your wealth, explore our latest guide revealing wealth preservation strategies from some of the UK's high-net-worth individuals.

Download the guide

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

Guide to preserving and protecting your wealth

Explore our latest guide revealing wealth preservation strategies from some of the UK's high-net-worth individuals.

See more

More insights

Hot inflation hits rate-cut hopes
By Garry White
Chief Investment Commentator
12 Apr 2024 | 11 min read
School fees, tax & retirement: challenges of the ‘squeezed middle’
By Louis Coke
Director of Private Clients
10 Apr 2024 | 9 min read
25 years of ISAs – how much could an investor have made tax free?
By Rob Morgan
Spokesperson & Chief Analyst
09 Apr 2024 | 5 min read
How ISAs could be the secret to an early retirement
By Russell Miles
Senior Personal Finance Commentator
08 Apr 2024 | 9 min read