Inflation Is Nearly Out Of Control - What You Can Do To Combat It
January 2007
There are two main reasons why Governments will always try and fudge the official inflation statistics -
- A high inflation rate will always make their economic policies look bad, but more importantly
- Higher inflation means they have to pay out more money in the form of pensions, dole & state pay packets
So the reporting of a lower inflation rate will always occur unless inflation is so benign (less than 1.5%) that nobody is focussing on it.
Who Believes The Office Of National Statistics (ONS)
Nobody really and the ONS has recently admitted this fact. But they’re trying to be proactive and have announced on their website a ‘Personal Inflation Rate Calculator’ where members of the public can input their bills and monthly expenses to find out what their own personal inflation rate actually is.
So now we’re able to officially and correctly estimate inflation as it refers to us versus the official government figures which at present are (Dec 2006) -
- 3% for the Retail Price Index (RPI) (housing costs not included), and
- 4.4% for the Consumer Price Index (CPI) – this includes housing costs
Official Government Inflation Chart - 1 Year
How Inflation Is Fixed
The way that Government’s fix the inflation rate is usually by what they call ‘hedonistic pricing’ which is a very complex range of calculations and equations. In fact it’s so complex that nobody can actually work it out which most probably is the whole point.
But put simply, hedonistic pricing will always massively dampen down the effect of anything that rises considerably in price.
So if the price of milk were to triple over the next year and applying the miracles of hedonistic pricing that might only equate to a rise of 40% versus 300%. Of course you can bet that if the price of Milk falls by 50% the full 50% would be taken into account in the inflation figures.
Your Own Inflation Rate - You Might Be In For A Shock
Play around with the personal Inflation Calculator and you’re bound to be somewhat upset with the official inflation figures. We’ve just added our own financial figures and came up with a personal inflation rate of nearly 7% which we think is pretty common for most people. Interesting most of the rise was down to the ever rising costs of food over the last year.
And it’s worse news for the older generation because some of them are reporting inflation rates of between 10%-12%.
Summary
So what can you do to defeat inflation? The simple solution is to simply save money. If inflation is running at say 7% then try and save this amount of money off your total monthly expenses. But even if you can only save 3.5% per year you’ll be well ahead of most people.
If you spend £1,500 a month then 7% is only £105 or £3.50 a day. This can easily be achieved by most people by being a smart shopper, buying only what you need and keeping a close eye out for special offers. For example, if you drink a lot of wine/beer then buy special offers in bulk. Purchasing car, home and holiday insurance via working the internet is another area where at least £100-£200 a year can be saved.
Whatever the case inflation is an important concept to understand re your personal finances and making sure you hard earned income is spent sensibly and logically.
See Also
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