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Cost of living inflation: How to calculate your personal inflation rate

Mar 28, 2023

As we all know, the cost of living in the UK has been rising steadily over the years. From food to fuel,and housing to healthcare, everything’s getting more expensive. And it’s not showing any signs of slowing down. This is known as ‘cost of living inflation’ and it affects everyone differently. 

It’s good to know that we’re all in the same boat. But what you’ll really be asking yourself is how do I calculate my personal inflation rate? Well, don’t worry! Loqbox is taking a look at what cost of living inflation is, how to calculate your personal inflation rate, and why it is important to do so!

What is cost of living inflation?

Cost of living inflation basically means the increase in the price of goods and services that we need to maintain a certain standard of living.
It can be due to many factors, such as rising wages, higher taxes, and increasing production costs. And if you don’t have savings in place, you could feel the sting of rising costs.

The UK government sets a target for inflation at around 2%, but we’ve recently witnessed the actual rate of inflation go far above this. Inflation is measured by the Office of National Statistics (ONS). Every month, the ONS looks at the increase in price for regularly purchased goods and services and measures it against the same month from the previous year to calculate the Consumer Price Index (CPI)

Different goods and services will impact the cost of living inflation differently, depending on which have increased in price. So your personal inflation rate will vary from person to person depending on which goods and services you use. Let’s take a look at how to calculate your personal inflation rate.

How to calculate your personal inflation rate

Your personal inflation rate is the rate at which the cost of living is increasing for you personally. It is important to calculate your personal inflation rate because it can help you plan your finances and adjust your spending habits accordingly. 

Quick note before we start

If you’d rather not do the maths yourself, the Office for National Statistics have created this handy calculator as a shortcut to work out your personal rate of inflation.

But if maths was your favourite subject at school and you’d like to flex your brain muscles this is how to calculate your personal inflation rate manually:

Step 1: Determine your expenses

The first step is to determine your expenses. This includes all the things you spend money on, such as rent, utilities, food, transportation, healthcare, and entertainment. Make a list of all your expenses and the amount you spend on each one.

Quick tip! While you’ve got all of this information in front of you, if you haven’t already, maybe consider putting a budget together. This saves you doing it twice, and creating a budget is a great way to take control of your finances. You can read more here about different budgeting rules and which will work best for you.

Step 2: Determine the base year

The base year is the year you want to compare your current expenses to. For example, if you want to calculate your personal inflation rate for the year 2023, your base year would be 2022. It’s a comparison so you’ll want to use the previous year.

Step 3: Find the price change

The next step is to find the price change for each item on your list.  How much have your energy bills increased by? How much more are you paying for your mortgage or rent? What’s your monthly spend on groceries or nights out?

You’ll need to find out the price of each item in your base year and then the price of the same item in the current year. Once you’ve got your two numbers, subtract the price in the base year from the price in the current year. Divide the result by the price in the base year and multiply it by 100. That gives you the percentage change.

Step 4: Calculate your personal inflation rate

Right, nearly there! Now, just calculate your personal inflation rate by adding up the percentage changes for all the items on your list and dividing the total by the number of items on the list. That gives you the average percentage change in your cost of living.

What is the personal inflation rate in the UK?

Your personal rate could be higher or lower than the current inflation rate in the UK. It totally depends on your individual circumstances. You may have solar panels at your home so you haven’t felt as much of a pinch with the energy bills increasing, or you may catch public transport more often than the average person and can feel your wallet is taking the hit.

Factors that can affect your personal inflation rate include where you live, your income, and your spending habits. 

Why should I calculate my personal inflation rate?

Calculating your personal inflation rate can help you make better financial decisions by empowering you to adjust your spending habits to fit a truer view of your lifestyle.

Staying financially secure is about keeping an eye on your expenses and changing what’s right for you. By following these steps, you can work out how much the cost of living is increasing for you personally.

Once you know your personal inflation rate you can start to shift your budget in the areas that are most impacted. If grocery prices have soared, perhaps you need to look at what food you buy or what shops you use. If your energy bills have rocketed up, it might be time to try and negotiate your bills or find a better value competitor.

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