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Inflation is more personal than you think

Higher inflation than we have been used to may be with us for some time to come. The rise in the rate of inflation over the past year has been causing concern, understandably, as it makes for bold headlines in national newspapers. But it is important to remember that we are unlikely to be paying the national rate of inflation personally or as a household.

The national inflation rate is the measure of how the prices of the goods and services bought by households rise or fall. It is based upon items in a basket of goods put together by the Office for National Statistics (ONS). This basket is reviewed annually to better reflect consumers’ buying trends and to make sure the indices are up-to-date and representative of consumer spending patterns.

Items in the basket are sorted into categories, such as food, transport and home appliances, and each category is weighted according to aggregate consumption so that more commonly purchased items have more of an impact on the inflation figure. As this basket can contain around 700 items, few if any of us will purchase that exact basket of goods. Our personal shopping list is likely to be considerably different and so our personal/ household rate of inflation will also be different.

The table shows the 12 categories in the basket of goods used to calculate Consumer Prices Index (CPI) and the percentage weighting applied to each category as of March 2023.

CPI basket of goods Weighting
1. Food and non-alcoholic beverages 11.90%
2. Alcoholic beverages and tobacco 4.20%
3. Clothing and footwear 5.80%
4. Housing, water, electricity, gas and other fuels 14.10%
5. Furniture, household equipment and maintenance 6.80%
6. Health 2.40%
7. Transport 13.70%
8. Communication 2.30%
9. Recreation and culture 13.80%
10. Education 2.90%
11. Restaurants & hotels 13.80%
12. Miscellaneous goods and services 8.30%


In simple terms, inflation driven by price tends to be temporary. For example, where food supply is more limited, this can drive up food prices. Once those supply factors have been resolved, then inflation usually comes down again. The Bank of England seeks to influence the supply/demand equation by increasing interest rates, restricting consumer spending power, thereby reducing demand, which then brings down prices.

However, wage inflation, where wages/salaries rise in recognition of the rise in inflation, sometimes known as ‘embedded’ inflation as wages and salaries tend not to come down again, means people have more money to spend and inflation can become more permanent.

Combating inflation

The question is, how can we use our savings and investments to help combat the effect of rising/high inflation?

Returns on cash deposits are far below the current inflation rate and to get the highest rates for your money, usually means tying it up for a set period of time – typically one, three or five years. If inflation stays high, this effectively means the spending power of your money is reducing year on year by the difference between the interest rate you are receiving and the rate of inflation (bearing in mind that we all have our personal inflation rate).

What we are looking for, therefore, is to achieve a net rate of return closer to or exceeding inflation (taking into account charges on the investment/savings products). This is more likely to be achieved by putting money in investment funds, which derive their returns from the stock market. Stock markets are affected by investor views of future returns, whereas economic performance is based on historic data. This means investment sentiment and so performance is not usually directly aligned to economic

Diversifying investments within a portfolio is important also to spread the investment risk. An investment we favour in this kind of economic and market scenario, as a way to manage risk and maximise returns, is structured products. We firmly believe that structured products are key to a well-diversified portfolio, especially in uncertain times where their defined return profile can perform exceedingly well in range bound and even falling markets, thanks to snowballing coupons. Structured products also build in the fees, so you know the defined percentage return is what you will receive.