We’ve covered inflation on this blog before, but for the uninitiated, inflation is a measure of the increase in prices.
So, inflation at 2.3% means that on average, a “basket” of goods – more on that later – would cost 2.3% more today than it did the same time last year.
That “basket” of goods used to form the benchmark is regularly updated to account for households’ evolving spending trends. So, in the most recent update, gin, almond milk and bike helmets made it in and menthol cigarettes and pay-as-you-go handsets are out (the original basket from 1947 included mangles).
Of course, if you change the items you include (which is the subject of some debate), you get a different figure, and there are several different measures of inflation. The main measure to date has been the Consumer Prices Index (CPI).
Today’s update is notable though, because the Office for National Statistics (ONS), which compiles the figures, is shifting to a newer measure called CPIH which factors in housing costs – things like mortgage payments, council tax and estate agents’ fees.
If you include these costs, you tend to get a higher rate of inflation, and therefore CPIH is expected to be higher than its predecessor, CPI. Coincidentally today, both measures happen to be 2.3%.
So what does that mean for your savings and investments?
Inflation erodes the value of money in general, and in times of high inflation it’s particularly important to pay attention to your returns, as if your money is earning interest at a lower rate than the expected rate of inflation, you stand to lose money in real terms.
It’s especially important to keep your finances under review, especially given the average instant access account currently pays just 0.15%. Of course, a bank account is the best place to keep rainy day money, but if you want to put your money to work, taking on some risk can be a way of earning a better return.