No one is immune from the ‘inflation pinch’

interactive investor comments on ONS data on the cost of living and suggests ways you can mitigate the worst of the impact.

• Around nine in 10 (87%) adults reported an increase in their cost of living over the previous month in March 2022 (16 to 27 March 2022), according to the ONS.
• Nearly a quarter (23%) of adults reported that it was very difficult or difficult to pay their usual household bills in the last month.
• The most common reasons reported by adults for increased cost of living in March were increases in the price of food shopping (88%), gas or electricity bills (83%) and fuel.

Commenting, Myron Jobson, Senior Personal Finance Analyst, interactive investor, says: “The ONS data highlights the stark reality that the vast majority of us have felt the inflationary pinch – which threatens to turn into a stranglehold for low-income households.

“No one is immune from the biggest rise in the cost of living in generations, with the cost of seemingly everything from the food we put on our tables to the fuel that powers our cars on the up.

“The triple threat of rising food, energy and fuel prices has hit the average consumer hardest, and the harsh reality is with inflation outpacing the growth in earnings, more and more household budgets will crumble under the weight of runaway inflation.

“The amount of people who said they struggled to afford their energy bills in March is likely to rise in the coming months following the rise in the energy price cap in April, adding £700 to a year to the average household's bills.

“The cost-of-living crisis could force stark choices on everyday day expenditure which, for many, will drastically reduce their quality of life. The fall in retail sales in March, with non-store retailing the largest contribution to the fall, as reported by the ONS, suggests that more and more people are less inclined to spend on anything more than the essentials.

“Higher prices have become the new status quo and will remain so for some time. Things are set to go from bad to worse with the energy price cap set to rise again later in the year, while the prospect of higher interest rates would intensify the financial burden on variable-rate mortgage holders, while the cost of borrowing could rise.

“When prices are on the rise, it is important to reassess your spending habits to get a better idea of the goods and services that are eating most into your finances and make the necessary adjustments to your current plan.”

Myron Jobson outlines steps to mitigate the worst of the impact of the rising cost in living.

1. Make small changes to your budget across all categories

“Instead of making swingeing cuts to a couple of areas of expenditure, making smaller cuts across a broader range of spending can be a more palatable way of cutting costs. For example, you don’t have to completely forgo your daily coffee purchase, but you can cut back on how often you buy them.”

2. Save on food bills

“Shop around for the best deals – especially for high-ticket items. Even simple things such as opting to purchase a store brand equivalent of traditional larder products can help to cut down the cost of groceries. If you’re anything like me and find it impossible to distinguish between store brand and premium brand rice, opting for the cheaper version can help save on cost, without compromising on flavour.

“Consider buying items in bulk so you are not constantly spending as prices continue to climb. It is also worth taking advantage of supermarket loyalty schemes - such as Tesco Clubcard and Nectar card – which can give you access to unlock big discounts and other exclusive rewards.”

3. Review subscriptions

“From Netflix to newspapers, we pay for many goods and services that we use on a daily basis through monthly subscriptions. It is important to keep tabs on how many subscriptions you have and consider those that you no longer need, or have been meaning to cancel but have never gotten around to it. Removing a £10 subscription from your monthly outgoings might not sound like a lot, but this amounts to £120 over a year – not to be sniffed at.  

“Sharing streaming subscriptions within your household can also be a cost-effective way to save money. Most streaming services allow users to create separate accounts that can be personalised based on your preferences.”

4. Mobile phones

“Those approaching their end of their mobile phone contracts should consider their options. You could save big by skipping an upgrade. Sure, you might be missing out on a few new bells and whistles but forgoing an upgrade could save you a pretty penny that could shore up your financial position amid escalating prices.

“If you are happy with your current phone, then stick with it and move on to a SIM-only deal, which is cheaper than a contract that comes with a phone.”

5. Savings

“Ballooning inflation underpinned by increases in the cost of energy, food and fuel has resulted in the biggest decline in living standards since the 1950s. For those trying to catch up on savings, high inflation is a blocker, because rising prices leave less to spend on other things.

“Those who became accidental savers during pandemic, by keeping jobs while facing fewer outgoings during the Covid lockdown, may need to use some of the cash to tide them over during the cost-of-living crisis.

“Savers considering locking their cash into a fixed-rate fixed-term deal for a better rate of interest should consider whether they’d need to access some of that cash if the cost of living continues to grow. While the high rate of inflation means that most people’s savings are effectively losing value, it still pays to shop around for the best deal.”

6. Salary sacrifice

“The impending hike in National Insurance contributions has bolstered the allure of employment salary sacrifice schemes, as they can be used to offset the rise. This arrangement allows employers to reduce employees’ salary and pay the equivalent amount into a non-cash benefit such as pension contributions and a cycle-to-work scheme. Think of a pension as deferred income and this seems like a good way to reduce your overall NI bill without reducing your income, if you are happy to take it after age 55 instead.

“These benefits reduce the NI payable by the employee as well as the employer. However, a lower salary can affect entitlements such as maternity/paternity pay mortgage applications based on one’s income, and some state allowances. As such, people should always consider how such benefits could impact their finances more broadly.”

7. Work out your inflation number

“If you don’t use a budget to manage your spending, it’s difficult to know where you stand. Everyone has their own inflation number – it’s worth keeping a spreadsheet of your own spending habits so you can get a better idea of the goods and services that are eating most into your budget, and where you could cut back. If you don’t have a budget, now is a good time to start one.”