How to cope with inflation

With inflation rates currently remaining high, it’s important to understand how inflation can impact our finances. And, more importantly, how to inflation-proof your money to avoid rising costs leaving you feeling the pinch.

Here at Novuna Personal Finance, we’ve put together a guide to help you stay one step ahead of inflation.

What is inflation?

Simply put, inflation is how the price of goods and services is measured over time.

You can easily find the UK inflation rate online. But perhaps the best way to measure the tangible impact of inflation is to compare how much you can buy today versus a few years ago. You might notice that your money isn’t stretching as far as it used to, which can be concerning when you’re trying to keep track of your finances.

What is the current inflation rate in the UK?

The annual inflation rate in the UK is 6.8% (July 2023). Inflation in the UK reached its highest level (11.1%) in 41 years in October 2022, though we are starting to see inflation slowly lower.

Official inflation rate figures are determined by the Office for National Statistics (ONS), who analyse the price of a ‘basket’ of everyday items to measure the percentage change in price compared to a year ago.

Why is inflation so high?

There are several factors that contributed to inflation rising in 2022 and into 2023. For example, the ongoing war in Ukraine led to fewer resources from Russia being available, ultimately resulting in a rise in oil and gas prices and the price of food and drink going up too. There was also global ‘hangover’ from the Covid-19 pandemic, with supply chain disruption continuing to cause problems.

Despite inflation rate rising throughout 2022, we are now starting to see inflation lower in 2023.

How are inflation and interest rates related?

The Bank of England aims to keep inflation at 2% so, as you can see, the current rate is significantly over target.

The best way to combat rising inflation is to slow down spending, which lowers demand and is thought to reduce pricing. One way to do this is to increase the Bank of England Base Rate which increases the cost of borrowing, particularly mortgages, and reduces people’s spending power. This therefore slows down the demand for goods and services. It also encourages people to save their money.

How does inflation impact my finances?

Inflation affects the cost of living, such as transport, energy, and food. It also impacts interest rates on savings accounts, the performance of companies and share prices.

Unpredictable inflation rates make it tricky for you to plan how much you can spend or save, as you won’t know how much items might cost from one month to the next. Knowing where you can expect to see increased costs could help you to better manage your outgoings.

1. Increased costs across the board

From your weekly shop to big-ticket purchases such as new cars or home extensions, you’ll notice prices start to creep up when inflation is on the rise.

This is predominantly caused by high demand for goods and services, supply chain disruption, rising import costs and fewer resources being available globally. As suppliers are passing on increased costs to customers, you can expect to see the cost of items rise when inflation does.

2. Decreased spending power

As you won’t be able to afford the same amount of goods and services you could a year ago, this effectively means your money is devalued.

Unless your income rises in-line with inflation, you could find it harder to continue to spend at the rate you’re used to. Everything’s that little bit more expensive, and you won’t be able to buy the equivalent amount of goods as you could before with the same amount of cash. So unless there’s more money coming in to counter the impact of inflation, you might need to make spending cuts.

3. Impact on the value of long-term savings

Money in your bank may lose value in ‘real’ terms during a period of inflation as interest rates are likely to stay below the inflation rate. Your money simply won’t go as far as it used to due to rising inflation rates, and the interest accrued from your savings account is highly unlikely to make up the difference.

It’s true that keeping money in a savings account that pays you interest at 2% will result in you having 2% more money in a years’ time. But you won’t be able to purchase as much as you could a year ago due to the devaluing effect of inflation.

That said, it’s always a good idea to have easily accessible savings to make sure you’re covered for a rainy day. As a general rule, if you think you’ll need access to the money in a few years’ time, it’s best to save your money rather than invest it.

4. Higher house prices

New build property prices may feel the impact of inflation, as construction materials typically become more expensive during periods of inflation. This means those looking to buy a new build house may be faced with higher-than-expected prices.

5. Increased mortgages

As we’ve already discussed, rising inflation comes hand-in-hand with increased interest rates. As banks and building societies bump up their interest rates, you could find yourself paying much higher monthly mortgage payments.

Some homeowners may wish to consider fixing their mortgage rather than opting for a variable mortgage. At least, this way, you’ll have a fixed sum of money leaving your account each month so you can better manage your outgoings and keep track of your finances without any nasty surprises.

How can I inflation-proof my money?

The growing cost of living is causing all of us to evaluate the way we spend and save. Here are our top tips for dealing with inflation…

Sort out your savings

If you have an emergency fund, keeping it in a competitive easy access savings account with the highest rate of interest you can find is a must. Not only will this allow you access to it at short notice without breaking any conditions, you’re also likely to gain extra cash if you leave it untouched.

Any extra income that you won’t be using for six months or longer is worth putting in a fixed-rate account. Fixed-rate ISAs tend to offer a better interest rate than most easy access accounts so the longer the term, the higher the rate.

Review your finances

If you’re on a tight budget, price increases are likely to put further pressure on your spending. Review how much money you have coming in, and how much you estimate goes out each month — this’ll give you an idea of your disposable monthly income so you know how much you have to play with. You might find you can cut your expenditure without too much trouble.

Doing your homework can help you negotiate better deals from your suppliers, rather than having to reduce or cancel services. Start by comparing your phone contracts, TV & broadband services, and insurance policies to see what the best deals are, then give your suppliers a call to see what they can offer. You’ll be surprised how often you’ll receive a discounted rate just by asking.

It’s also worth taking stock of your bank and credit card transactions to see where your budget is going. Often, you’ll come across a trial membership you forgot to cancel and are paying full price for six months later.

For more advice on getting your finances in order, take a look at our guide.

Sell strategically...

If you have assets that have gained value recently, such as a second car, now could be a good time to sell. Make an inventory of things you own that you no longer need. From toys to technology, you could be surprised what items have increased in value due to inflation. You’ll find decluttering your home could maximise space and help your home feel fresher.

While it’s a good idea to have a clear-out — and make a profit while you’re at it — you shouldn’t sell items you still have use for as you might only end up buying them back at a higher price later down the line.

... and buy strategically

The price of many items has skyrocketed in recent months. From clothes to meals out, we’ve all seen everyday goods and services increase in price.

If you regularly buy new clothes or eat out, consider minimising your expenditure. Do you really need a brand-new wardrobe, or can you find bargains in a charity shop or online marketplaces such as Vinted? It’s easier than it may seem to reduce your spending — especially if you keep track of your outgoings.

Don’t miss out on a better price for big-ticket items

With the price of cars, home renovations, holidays and tech on the rise, it’s certainly possible that supply chain issues and shortages may lead to even larger price increases.

While it’s a good idea to reduce the amount you spend day-to-day, you might want to avoid waiting too long to buy bigger purchases in case the price creeps up even higher.

If you need a hand with any large investments, our low-cost personal loans are here to help. Borrow between £1,000 and £35,000 with competitive rates from as low as 7.4% APR Representative (£7,500-£25,000) which can be spread over 2 to 7 years, making it even easier to manage your repayments.

Be creative to cut costs

You could opt for DIY home renovations or re-evaluate how much gas and electricity you use and see if you can save money on your energy bill.

Little lifestyle changes can make a big difference to your monthly outgoings. Why not keep track of the savings you’ve made to give yourself extra motivation?

Give your pension a boost

It’ll cost you less to save money into a pension pot, as some of the money that would’ve been used to pay tax goes into your pension instead — you can find out more about tax relief and your pension here.

Pensions typically grow at a faster rate than inflation over time (despite this not being the case recently), so all-in-all it’s a good idea to save for your future if you can.

Make your weekly shop count

If your weekly shopping bill is getting out of hand, there are a few ways to slash your spending:

• Don’t deviate from your shopping list. By avoiding browsing the aisles, you’ll avoid being tempted to pop an extra treat or two in your basket.
• Plan meals that focus on cupboard staples such as tins and dried goods. If the cost of your recipes is sky-high, it’ll be hard to keep your spending down when you shop. You could also experiment with batch cooking to keep costs low.
• Switching out brand names for supermarket own labels will help you get more bang for your buck, and most of the time you won’t even notice the difference.
• Go for frozen veg or dried pasta instead of fresh. Not only is it cheaper but it’ll last longer without sacrificing any of the taste!
• Shop later in the day, when supermarkets start reducing produce which is close to its best before date but still perfectly useable.

Review your salary

Though wages are increasing, pay rises simply aren’t keeping up with inflation.

If you feel that you’re being underpaid and deserve more, start checking your current salary against the national average for your industry and of other similar roles in your area. Also, if your employer is currently recruiting, take a look at the salary on offer and open a conversation about a pay rise with them.

If asking for a pay rise just isn’t possible, consider if there are any ways for you to generate extra income. You could earn some cash by doing what you love, turning your hobby into a money-making mission.

Don’t miss out on achieving your dreams

Rising inflation shouldn’t mean you miss out on your perfect wedding day, a once-in-a-lifetime holiday or finishing off that home renovation project you’ve been thinking about for years.

With a personal loan, you can borrow up to £35,000 with low interest rates from 7.4% APR (£7,500-£25,000). You can get the cash you need to reach your goals sooner, while spreading the cost of the loan over manageable fixed-rate monthly instalments. This is an ideal option if you don’t have the ready cash to pay for a big-ticket item upfront and need access to extra funds quickly.

For more hints and tips on managing your finances, bookmark our Hints and Tips page or follow us on Facebook.