I’m going to consider what the recent increase in the cost of living has meant for our family expenditure. I will look at what we spent then, when inflation was low. I will then compare that to what we are spending now, after inflation has (hopefully) peaked and is falling. As someone who considers themselves as financially independent, but also retired early, price inflation is a danger. We are a family of four including two school age children. I regard myself as retired, but I am not drawing any pension. My wife is not working. We own our own home and have no mortgage to pay. I’m aiming for us to live within the natural dividend income yield of my portfolio of investment trusts. That yield was 5.46% on 31 May 2024.
Inflation indices
We’ve had what people have called a “cost of living crisis” in the UK over the last three years. This period included the end of lockdown restrictions and the Russian invasion of Ukraine. In July 2021 the consumer price index (CPI) annual rate of increase was 2.0%. It then rose to a peak of 11.1% in October 2022 and has since fallen to 2.3% in April 2024. It was above 3.0% for 32 months. Similarly, in July 2021 the retail price index (RPI) annual rate of increase was 3.8%. It then rose to a peak of 14.2% in October 2022 and has since fallen to 3.3% in April 2024. It was above 4.0% for 32 months. Overall, by my calculation CPI rose by 20% and RPI rose by 26% between July 2021 and April 2024.
| Inflation Index | 31/07/2021 | 30/04/2024 | Growth |
|---|---|---|---|
| RPI | 305.5 | 385.0 | 26.02% |
| CPI | 111.3 | 133.5 | 19.95% |
Those April figures may mark the end of the “cost of living crisis” or it may be just a pause before inflation worsens again. A general election has perhaps been called on an assumption that it is the former rather than the latter.
Our spending
Comparing our spending for the twelve months ended 31 May 2024 against the twelve months ended 31 July 2021 the headline increase was 25.03%. This at a time when our income, from dividend payments, only rose by 8.16%.
Our biggest essential spends are groceries, council tax and energy costs. Groceries are up 20.61%. Comparing only the final three months of these two periods does, however, show a higher increase of 28.98%. Council tax is up 24.98%. Our council has been one of the worst in the country for increasing the Council Tax. Energy costs are up 56.23%. They’re over 100% up since 2019. Overall, this big three are up 28.18%. That’s above both CPI and RPI. Those costs were 26.3% of our total spend in the earlier period and are now 27.0%.
In the later period we also spent significantly more on certain luxury or discretionary items including home improvements, furniture, and holidays. We also had higher car repair costs but incurred lower capital gains tax. Overall, these items are up 335.11%. They were 4.0% of total spend in the earlier period but 13.8% in the later period. These were choices we made. Holidays were more limited in the earlier period by lockdown restrictions, and we didn’t want to do home improvements at such a time. The spending in the later period can be seen perhaps as catching up. Home improvements and furniture purchases can be postponed from year to year, but we now feel we don’t want to let things deteriorate too much. In the last year we’ve played catch up on new windows, new sofas, and new dining room furniture.
All other spending only rose by 6.14%. These were 69.7% of total spend in the earlier period and 59.2% in the last year. This includes smaller essential costs and most of our luxury and discretionary spending. It looks like any increased prices were mitigated by lower consumption on our part. For instance, insurance costs rose, clothing purchases were higher, but electrical goods purchases were lower.
Inflation as measured by the indices has increased our costs especially on our big three essentials. Our choices have also increased our costs on certain bigger items but look to have reduced our costs on certain smaller items.
Summary
| 12 months to | 31/07/2021 | 31/05/2024 | Growth |
|---|---|---|---|
| Income | 100.00 | 108.16 | 8.16% |
| Three Essentials | 16.50 | 21.15 | 28.18% |
| Choices made | 2.49 | 10.85 | 335.12% |
| All other | 43.71 | 46.39 | 6.14% |
| Saved | 37.30 | 29.77 | -20.19% |
We were well placed in the twelve months ended 31 July 2021 when we only spent 62.7% of our income. That helped us to feel able to spend more money on home improvements, furniture and holidays in the later period. Having done that and endured the high inflation on our big three essentials, in the twelve months ended 31 May 2024 we spent 72.5% of our income. We saved 20% less. Hopefully price inflation will now stay below 3% and hopefully dividend income growth will be able to beat that. There are some more home improvements and holidays we would like to be able to afford in the future (and a new car).
I hope you are correct about turning the corner on inflation. Having said that, I am not sure when, or even if, any of the biggest increases will go into – at least a partial – reverse. I suspect we are stuck with permanently higher prices in most areas – whether this is actually justified or not! IMO, there has definitely been some price gouging and a certain amount of greed – and not to forget shrinkflation and skimpflation too. One obvious example being telecoms/internet providers and their inflation (often RPI) plus plus price hikes!
Labels like “cost of living crisis” seem to have a tendency to be self-fulfilling.
I guess you are old enough to remember decimalization? Believe it or not, the same things happened when most of Europe changed to the Euro too.
Re: “but I am not drawing any pension”:
Have you considered annuities – AFAICT they are currently much better VFM than they were?
Thanks for your comment. I agree that we are likely faced with permanently higher prices and that there has been some opportunism by some businesses. For some things you can buy less or stop buying in response to price rises but some things you can’t. Of my big three compulsory spends I expect groceries to move with CPI/RPI, and council tax to increase after the election. Energy costs could fall but are subject to government policy and world events.
Our internet provider (Zen) has held prices, but they were never the cheapest.
I do remember my parents blaming decimalization for rising prices, and I also remember some rounding up of prices at the sweet shop.
I agree that annuity rates are better now than they were, but my portfolio yield gives me about 90% of the income of a level annuity and should rise each year.