Recently, we’ve been asking our clients what has happened to their expenditure over the last year. Almost all of them have told us that they have spent less.
But the ONS tell us that the annual inflation rate is 0.9%, so surely costs have been going up.
It’s perfectly reasonable for your personal costs to be going down whilst inflation has been going up, and the lockdown has provided us with an extreme example of why this can happen.
The answer is that inflation measures don’t take account of how much we consume, they just measure the price of those things. So, transport costs have been rising, but most of us have been travelling less. So, we have been paying less to travel, even though the cost of rail fares, for example, has been rising.
This same apparent contradiction explains why pensioners’ expenditure tends to reduce, in real terms, year on year. We spend less in retirement because we tend to buy fewer things; the cost of long haul flights may well continue to rise, but if we don’t want to go on long plane journeys any more, our expenditure reduces as we move from long haul to short haul.
The fly in the ointment here is that there are some types of expenditure we can’t avoid. You might not put as much recycling in your bin next year, but your council tax is still going to go up! And it’s pretty difficult to avoid paying your electricity, gas or phone bill. These unavoidable types of expenditure tend to rise, more or less, in line with inflation.
The consequence of this is that inflation is important if most of your spending is made up of unavoidable items, but much less so, if you spend your money on discretionary items, where you can simply choose not to buy them. Sadly, this means that less affluent households tend to be more affected by inflation.
This is one of the reasons why we split annual expenditure between essential and discretionary items in our retirement plans (there are other good reasons to do this too).
The general rate of inflation is a useful tool for retirement, but for some people, it’s more important than for others.
Philip Wise | email@example.com
Managing Director and Chartered Financial Planner