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Burst your inflation bubble
By Hannah Ricci
Chances are you've noticed prices creeping up in most areas of your life lately. Despite wages rising by an average £44 a month this year, families are facing an increase of £148 a month in essential living costs, according to a survey by uSwitch.
It found that the average pay rise in Britain would be 3.4% this year, compared with a 9% rise in bills, meaning the nation's households will be left £21 billion out of pocket.
Inflation in March was 2.5%, but for many people across the UK the rate of inflation actually feels much higher, as price rises start to bite.
The top five energy companys have all put up their prices, water bills are set to rise by 5.8%, and council tax is likely to increase by 4%.
Food prices are also on the rise, with food price inflation hitting 6.6% - the highest since June 2001. This is mainly due to a poor summer affecting crops such as wheat and vegetables, although the cost of meat and dairy products has also risen fast.
Analysts at mySupermarket, which tracks food prices, say the three biggest supermarkets - Tesco, Asda and Sainsbury's - increased their average price for a basket of goods by 12% last year, adding up to £750 to the average family's annual food bill.
Rail fares have risen by an average 4.8% this year, with some commuters facing hikes of 14.5%. The price of fuel has also rocketed, rising from 71p a litre to 104p since 2003, according the AA.
For many people the Government's 'official' rate of inflation is meaningless. The general rule is that the less wealthy suffer the most, because they don't have surplus income to absorb rising costs. Retirees are the hardest hit of all because most pensioners' incomes are fixed and a large proportion of it is spent on necessities such as utilities and food - which are rising the fastest. According to the study, those aged between 50 and 74 have the biggest average inflation rate of 2.9% - 32% above the official rate.
The cost of independent education have soared by 13.2% in the past year, and are a third higher than they were three years ago. The average independent school now charges almost £9,000 a year for day pupils, while boarding fees have risen to around £20,000.
And according to the Daycare Trust UK, the cost of a typical nursery place for a child under two in England is now £8,368, a 5% rise since 2007. Households in the UK are spending almost £1,200 a year on private healthcare, according to research by think tank, Reform, and premiums for private health insurance soar by up to 15% a year.
Not everything is on the rise however. According to ONS figures, the price of clothing and footwear, furniture and audio-visual products have fallen this year.
Beat inflation
The first step to dealing with rising prices is to find out which areas of your expenditure are most vulnerable. Use the personal inflation calculator on the Office for National Statistics website to work out your own inflation rate. By entering how much you spend in different areas, it shows how your income is allocated and therefore what price rises will affect you.
When prices are rising it's more important than ever to ensure you're not paying more than you need to for everything from your mortgage and utilities, to insurance and your weekly shop.
Mortgage repayments are most people's biggest expense, which is why Katie Tucker, technical manager at broker John Charcol thinks homeowners have experienced the highest inflation of all groups of people in the past year.
Being on a dud mortgage deal or languishing on your lenders standard variable rate can cause an unnecessary drain on your finances, so take time to research the market and remortgage when your current deal comes to an end. "Anyone remortgaging from an SVR of 7.25%, to a rate of 5.05% or below, would effectively be offsetting the effects of inflation," explains Tucker. On a £150,000 mortgage, switching between these rates would save £203 a month.
Shopping around is equally important when your insurance comes up for renewal. It's the easy option to renew with your existing insurer, but the best deals are usually offered to new customers, so it pays to see what else is on offer because the insurance market is very competitive.
Pretty much every household in the country will be experiencing an increase in energy prices, as the five big suppliers have all hiked their prices this year. Trying to save money here is a huge frustration because many people switched suppliers when prices dropped at the start of 2007, only for them to rise again a year later.
However while the savings for regular 'switchers' may be small, if you haven't switched before you could save hundreds of pounds every year.
With other household services, such as phone, broadband and satellite TV, it's just a case of shopping around to get the best deal and not paying for services you don't need.
When it comes to shopping, it can be quite difficult to cut costs unless you are prepared to change your spending habits. But if you are, simple changes like switching supermarkets and sticking with supermarket branded products can make big savings.
When buying other products, such as household appliances, gadgets, or books, CDs or DVDs, use a shopbot to shop around for you. There are a number of sites, including Kelkoo, Pricerunner and Shopping.com, which will scour the market to find you the cheapest price.
To cut fuel costs, visit petrolprices.com - enter your postcode and how far you're willing to travel, and it will list the days cheapest petrol stations for all types of fuel.
For some expenses you may be able to make savings by teaming up with other people to share your resources.
Savings
The most immediate effect of inflation is certainly on your day-to-day spending.
Our current inflation rate of 2.2%, for example, means that £3,000 five years ago is worth just £2,684 today. A basic-rate taxpayer will need to earn at least 2.75% in interest to beat inflation, while higher-rate taxpayers will need to earn at least 3.67% before their money even starts to grow in real terms.
Gavin Haynes, managing director of Whitechurch Securities says bonds, fixed-interest and cash based investments will all suffer as a result of inflation. 'These are not a safe place to be when prices are rising. It's important to build a well-balanced portfolio, and that includes equities.'
Haynes likes equity income funds, because they aim to produce dividends to boost annual growth greater than inflation.
If you still don't like the idea of equities however, the risk averse could go for index-linked gilts - government bonds - or National Savings and Investment products, which are also index-linked.
It always makes sense to keep some money in cash savings accounts. However much you have in the bank it pays to remember that it's unlikely to grow as fast as other. That means earning the best rate of interest you can and making the most of your ISA allowance to protect your cash from the taxman.
Finally don't just need to think about inflation when choosing your investments; you also need to incorporate it into your financial planning. Investors should err on the side of caution by making decisions based on a rate higher than the official rate of inflation.
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