Budgeting: Understanding Inflation

Understanding inflation is key to making your money work. Inflation is a measure of how prices rise, which can have a big impact on your budget as costs for things you often buy may change, though it is unlikely that your wages will increase at the same rate.

The Bank of England aims to keep inflation at around 2%. Let’s say the overall rate of inflation rose to 3.5%. That would mean, in theory, your monthly outgoings might go from £600 to £621. Now that might sound manageable, but that is an average figure based on a wide range of goods and services, some of which might have higher or lower rates individually.

Inflation will affect people based on what they typically spend their money on. You might take a closer look at where inflation is felt in your day to day life. Take food shopping as an example. If food inflation was to reach as high as 20%, as it has in recent years, that could be a whole £20 extra per week on your food shop alone, if your family’s food shop was around £100. And if you drive a lot, then fuel inflation will affect you more than it does others.

It’s good to have an idea of how your personal spending and budget is impacted by inflation.

Over time, increased costs for different areas of your life add up. Without careful review and adjustment of your budget, you might end up using an overdraft or credit to cover basic living costs. This can quickly spiral and is best avoided if at all possible. Inflation affects us all, but it doesn’t hit everyone in the same way. It depends on what you spend your money on. Keeping track of how rising prices affect your own budget can help you stay in control and avoid relying on credit for everyday costs.

Of course, even with careful planning, there are times when money still feels tight. In another video, we’ll look at managing those lean periods and how to prepare for them.

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