You may well have heard about inflation. Many economists and financial experts have been discussing the potential for increasing inflation rates in the wake of recovery from the pandemic. Here’a a short guide how to cope with inflation.

High levels of inflation is something very few of us have dealt with in our adult lives. We haven’t seen really high levels of inflation since the 1970s and 1980s. Therefore, it’s normal to be unsure about what it could mean and whether we should be concerned about it.

Inflation is now at 9.4% – the highest level for 40 years.

This post is not financial advice. Please speak to a qualified financial adviser before making any major financial decisions.

1. What is inflation?
2. Is inflation bad?
3. Should I worry about inflation?
4. What can I do to cope with inflation?
5. How can my budget reflect inflation?
6. Should I be worrying about anything else?

What is inflation?

According to the Bank of England inflation is a measure of how much the prices of goods (such as food or televisions) and services (such as haircuts or train tickets) have gone up over time.

People usually measure inflation by comparing the cost of things today with how much they cost a year ago. The average increase in prices is called the inflation rate.

Each month, the Office for National Statistics (ONS) collect around 180,000 prices of about 700 items. They use this “shopping basket” to work out the Consumer Prices Index (CPI). CPI is the measure of inflation we target.

Is inflation bad?

Inflation in itself isn’t bad. It’s always there and is normal.

Think about the price of Freddos – when I was growing up they were 5p, now they’re about 25p! I may think that’s a terrible rip off, but, 5p is not worth the same as it was 20 years’ ago. Prices naturally have to increase to reflect this.

Central banks – in the UK this is the Bank of England – set targets to keep inflation at a manageable rate. This is meant to keep the economy functioning properly.

But, if inflation gets too high or too low, it can start to cause problems.

In very simple terms – if inflation is too high or it moves around a lot, it’s hard for businesses to set the right prices and for people to plan their spending.

On the other hand, if inflation is too low, or negative, then some people may put off spending because they expect prices to fall. Although lower prices sounds like a good thing, if everybody reduced their spending then companies could fail and unemployment levels could rise steeply.

Should I worry about inflation?

Inflation is not worth losing sleep over. As individuals, we have no control over inflation. And I try not to worry about things I can’t control – easier said than done I know!

What you can do is be aware of inflation and be as prepared as you can. None of us have a crystal ball, so we don’t know what’s going to happen.

Some people suggest that significant rises will only be temporary as the economy rebounds after the pandemic-related restrictions are lifted. If this is the case, it’s unlikely to have a long-lasting impact.

However, if high levels of inflation last longer, it is likely to become something we all need to learn to deal with.

How do I cope with inflation?

None of us can change the price of individual goods or services – unless we’re providing the services ourselves! (Freelancers, maybe it’s time to think about increasing your rates?)

Bit if you’re wondering how to cope with inflation, then you can start by making a few changes.

Take a look at all your expenses and see if there’s anything you can cut. For example, could you switch to cheaper brands for your food shop? Supermarket’s own brands tend to be much cheaper, and you can rarely tell the difference.

Or could you swap your weekly takeaway for a “fakeaway”? It might not be quite the same, but you can have fun cooking and enjoying something you made with your friends or family.

You could also look at increasing your income.

You might not have much luck asking your employer for a pay rise – there’s no harm in asking though! If it doesn’t come off, it could prove a good opportunity to create a second income stream. This also helps to protect you in the event of job loss. Here’s some ideas of ways you can make money online.

In terms of savings, it might be time to consider investing. Remember, you should have emergency cash savings before you start doing this.

If inflation rises significantly, the already low interest rates on your cash savings will do even less good. In real terms, you’ll effectively be losing money by holding too much cash. While returns are not guaranteed, you give yourself more opportunities to make your money work harder for you by investing.

How can my budget reflect inflation?

If prices increase significantly, your current budget might not reflect this. It’s important to review your budget regularly and make sure it reflects your up-to-date expenses. There’s no point budgeting £30 for your weekly food shop if it’s routinely costing you £40.

Don’t be too hard on yourself if you have to amend your budget slightly or decrease your savings for a while. Making sure you keep up with your bills and avoid debt where possible is the most important thing.

Cutting other expenses – whether it’s reducing your ‘going out’ fund or perhaps buying a few less non-essentials, might be a way to manage price increases and keep up with your savings and investments.

Budgeting is a guide. You should never be afraid to try a different style of budgeting or to be flexible, especially when dealing with unknowns like inflation. The important thing is to be aware of your monthly expenses and have a plan to make sure you can afford them all.

Should I be worrying about anything else?

As I said earlier, try to avoid spending too much time worrying. It’s not productive and rarely helps your financial situation.

However, there are some things that it might help to be aware of. One of these is energy prices.

Ofgem – the energy sector regulator – has already announced an increase in the energy price cap. Those on default tariffs will see an increase of £139, from £1,138 to £1,277.

A bit like inflation, you can’t beat a wholesale price increase. But, you can soften the blow. Switching energy providers or moving to a cheaper tariff may well help you mitigate these price increases and stop you budget being squeezed even more.

It’s also worth thinking about your savings and investments. For example, you may predict your total net worth might reach £100,000 in 5 years’ time. With inflation, £100,000 simply won’t be worth the same as it is now.

This isn’t a problem – it’s to be expected. But you should take this into account when you’re calculating how much you think you’ll need for a purchase or even retirement.

If you enjoyed this post about how to cope with inflation, please like and share it across social media or with your friends! I’d also love to hear your thoughts and experiences. What are your views on inflation? Do you think it’s something to be concerned about or do we not need to worry at all? Comment your thoughts below.