- Household costs inflation was 3.6% in the year to March, according to ONS figures released today (Household Costs Indices for UK household groups – Office for National Statistics)
- The household costs inflation rate tracks how changes in prices and costs affect different groups of the population
- Lower earners faced inflation at 3.7% (for those in the second decile), and higher earners at 3.5% (for those in the ninth decile*) – or 33.9% and 33.6% over five years
- For private renters it was 3.7% and for those with a mortgage it was 3.6% – but over five years those with a mortgage have seen 37.6% inflation, compared with 30.7% for private renters
- For retirees, inflation in the year to March was 3.6%, compared to 3.7% for non-retired households (or 33.4% versus 34.1% over five years), but many retired people are less able to cope with rising prices
Sarah Coles, head of personal finance at AJ Bell, comments:
“Waiting for inflation figures for the past few months has been like watching a first-time waiter with an overloaded tray of glasses on a polished floor. We know what disasters are about to unfold, but we’re powerless to stop them. For some groups, the wait has been even more painful, because inflation has been rising faster.
“Today’s figures show renters and lower earners have faced some horrible price rises over the past year, especially given that they’re less able to manage the additional burden. Rent rises have slowed in recent months, but because they typically make up 34% of tenant incomes, those smaller rises have still bitten hard. Meanwhile, these groups spend a bigger proportion of their income on the essentials, so the gradual rise in everyday bills has also taken a toll.
“Over the longer term, looking back five years, those with mortgages have cumulative inflation at an incredible 37.6%. This owes a great deal to how low mortgages were during the pandemic and how they rose dramatically in the years that followed. For renters, five-year inflation is a little lower, at 30.7%, but it’s still an astonishing level of price rises.
Retirees fare better than non-retirees
“There’s better news for retirees, who’ve seen inflation rise, but not by as much as it has for non-retired people. They’re still disproportionally affected by rises in the cost of the essentials, because overall they spend a larger proportion of their income on them. However, the high levels of those who own their home outright mean they are less affected by increases in rent and mortgage rates.
“Unfortunately, many retirees are less likely to be able to manage with any degree of inflation. Four in five of those with a defined benefit pension who opt for annuity will pick a level annuity** – which doesn’t rise with inflation. The attractions of a higher starting income outweigh their concerns over how inflation can eat its spending power over time.
“But the impact can be dramatic. The figures show that retirees have seen cumulative inflation of 33.4% over the past five years. Their state pension rises with inflation, at the least, but if a significant proportion of their retirement income is frozen at the same level, rising prices could hit them hard. The bad news is that things will likely get worse. As we watch higher inflation unfold in the wake of the conflict in the Middle East, life is only going to get tougher.
What can you do?
“If you’re yet to retire, it’s a useful reminder to consider the risk that inflation can pose to your income in retirement when you’re weighing up how to take an income from any defined contribution pension. If you want an annuity, don’t just think about the initial income, but the impact of inflation over time. It also makes sense to consider drawdown, as this enables you to leave a portion of the money invested, where it not only offers more flexibility, but can also keep pace with inflation. It’s why so many people consider drawdown, or a combination of drawdown and annuities as they go through retirement.
“For those living on a tight budget there are no easy answers, as inflation squeezes even harder. It can help enormously if you have drawn up a budget of everything coming in and going out, because it will help you identify expensive areas where you can shop around or cut back. Millions of people went through this process when we had double-digit inflation and it’s worth revisiting it again.
“Don’t assume any of your costs are written in stone – even those things you consider essential. You can shop around for a better energy deal. You can consider a water meter, so that cutting water use brings your bills down. You can talk to anyone you pay regular bills to about better deals. If you have finished the minimum contract on your phone, you can switch to a sim-only deal, which is significantly cheaper. If you have completed the minimum contract for media or broadband services, you can often negotiate a better deal if you’re considering leaving. Alternatively, you can leave and find a better deal elsewhere.”
*Deciles split the population into 10, in this case by earnings, so those in the second decile are the 10% who are second from the bottom. The second and ninth deciles are used so the results aren’t skewed by major outliers.
**Source: Pensions 2050: Evidence and Future Priorities – Interim Report
