Inflation hitting higher income households hardest

NEW analysis by investment and financial planning group Tilney has revealed that the wealthiest households have experienced a much higher rate of inflation over the last two decades than everyone else.

In its household inflation index report, Tilney calculated that the top 10 per cent of households – those with incomes above £78,500 a year – have seen overall inflation of 64 per cent since 1997. That’s compared to 50.7 per cent for typical households (those with incomes of £26,900 to £30,000 a year) and 53.8 per cent for the lowest income families (less than £10,400).

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Tilney made the argument that while the general rate of inflation is calculated by looking at how the price of a typical basket of goods has changed in price, the reality is that different households experience significantly different inflation rates as a result of their own spending.

As the wealthiest homes will have spent more on education, holidays and buying homes, while spending proportionately less on things like food and drink, they will have felt the effects of inflation most keenly.

Inflation has grown sharply in recent months, hitting a higher-than-expected 2.9 per cent in August, making it ever more difficult to savers to find an inflation-beating return from conventional savings accounts, adding to the allure of the peer-to-peer lending market.

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Andy Cowan, head of financial planning at Tilney, said that it is important that households plan for a level of inflation appropriate to them,

“To give an example, take someone in the top 10 per cent of UK households by income, investing £100,000 over a 20-year period, with the aim of generating a return of three per cent (net of inflation),” he said.

“If this household was to plan for the UK average inflation rate of two per cent, rather than the 2.5 per cent experienced by the top 10 per cent, they would miss their saving target by £16,749.48.

“This emphasises just how important it is to plan properly for inflation, by considering what exactly you spend your money on and how this could be affected by rising prices in the future. The last 20 years offer a useful guide to help with this.”