Article Inflation – what it is and how to manage rising costs

From higher petrol prices and sky-high energy bills to spending more on your supermarket shop, you've probably already felt the squeeze on your finances. We’re currently experiencing a cost-of-living crisis, with inflation reaching a 41-year high of 11.1% in October 2022.¹

Our research with 2,000 UK adults found that 64% of those surveyed are concerned about the impact of inflation on their personal finances.² But what is inflation exactly, and what can you do to cope with rising prices? 

What is inflation?  

Inflation is the increase in the price of goods and services. Usually, over the long-term, we can buy less and less with our currency. That's why a pound has been worth more historically.³ Another way to put this is that goods and services have become more expensive in relation to the pound. This is normal, but the change isn't always smooth – sometimes there's a sudden jump in the cost of living, and wages don't keep up. That's when inflation can become a worry. 

Every month the Office for National Statistics (ONS) checks the price of hundreds of items from cakes and vegan sausages to smartwatches, to see if they’ve risen or fallen. If prices were to fall, that’s called deflation. However, when it rises, that’s when inflation happens. 

The Bank of England would like inflation to stay at around 2%. But prices have been rising much faster, and average wages aren’t keeping up.

How does inflation impact me? 

Inflation affects different groups of people in different ways. For those on lower salaries, it could have a large impact as you might have less disposable income to absorb the rising cost of food, petrol and housing.

Young people with rent and student loan payments may find the inflation squeeze hits them hard too if they’re in lower-paid or zero hour contract jobs. People with a disability – who typically spend a greater share of their income on items driving inflation like food and energy – may also be feeling the crunch.

The ONS has recognised that everyone has their own ‘personal inflation rate’. For example, some people may spend a larger proportion of their income on fuel if they commute daily or on heating their homes. Pensioners fall into this category, as they tend to feel the cold more than younger people and may live in older, poorly insulated homes, so spend a significant amount on their energy bills.

How can I cope with rising prices? 

1. Reduce your costs  

Most of us could save a bit of money by cancelling subscriptions we no longer use or switching to a cheaper supermarket for your food shop. Using comparison sites to move to cheaper deals like car insurance and broadband could also help, and you sometimes receive additional incentives for switching. If you receive an email from a company that’s putting its price up – perhaps your TV package, or the newspaper you subscribe to – it’s worth calling them to haggle. 

Making some small changes to your home – or your parents’ home if they are struggling with rising prices – can make a big difference to an energy bill. Turning a thermostat down by 1 degree C could save you £145 a year.⁴ Draught-proofing a chimney when you’re not using it could save about £90 a year.⁴ Washing machines, tumble dryers and dishwashers are energy-hungry appliances, so think before you switch them on. Washing clothes at a lower temperature, using an eco setting on a dishwasher, and using a clothes horse rather than a tumble dryer could all reduce your bills.

If you haven’t already got a smart meter, you may want to consider requesting one from your supplier. Smart meters won’t save you money directly, but they do help you understand what you’re spending and on what – allowing you to better manage your expenses. Check if your energy tariff has an off-peak rate (normally called Economy 7 or Economy 10). If it does, try to make use of the cheaper hours, such as running your washing machine at night-time.

2. Increase your income  

There are several ways you could make a little extra income to supplement your salary. A second part-time job is an obvious example, such as working a few hours in the evenings or weekends. A side-hustle can also boost your income. Maybe you have a hobby such as upcycling, baking or jewellery making, where you could sell your hand-made goods. You might have a spare room you could rent out or have unwanted clothes and goods around the house that you no longer need and could sell on. 

There are also organisations and websites that will pay you to take part in face-to-face or online research and studies. Some surveys may take only a couple of minutes on your phone, and others can be longer and more extensive. They’ll all pay differently, and most will have rules around how many surveys or hours of research you need to take part in before you receive any money. Make sure to do some investigating before committing to make sure it’s worth the time and effort. 

Remember that any secondary income will likely come with tax and National Insurance implications if you exceed the tax-free personal allowance for the year, or your earnings fall into a higher tax bracket. It may also affect any benefits you may be receiving. You can learn more about how additional income might affect you on MoneyHelper.. This information is based on our understanding of current taxation law and HMRC practice, which may change.

3. Check your savings  

While savings rates have started to tick up, they may not keep pace with inflation. By shopping around, you might find different cash savings accounts with better rates that you could consider as a way to make your money go further. 

If you're under 40, there are additional savings accounts such as the lifetime ISA (LISA), that come with the benefit of a government bonus on any income up to £4,000 that you save. You can only withdraw money from a LISA before the age of 60 if it’s to purchase your first house, or if you have a terminal illness – and so this should be viewed as a long-term savings plan.

Consider having three to six months of your household expenses (such as rent/mortgage, food and bills) as a buffer in an easy-access savings account. If you already have that, one option could be to consider investing some of your money. But note that you should be prepared to hold the investment for at least five years ideally longer.

Investing could offer the potential to beat inflation, but it also comes with increased risk. The value of an investment can fall as well as rise and isn’t guaranteed. We recommend speaking to a financial adviser who can help you make the right choice for your circumstances. You can find an adviser on the MoneyHelper website. There’s likely to be a cost for financial advice.

Stay positive

Inflation is a worry for many of us, but financial pressures are best tackled by facing any challenges head on. By exploring simple changes to your daily routine (and perhaps some savvy saving and side-hustles), you can take control and protect your financial wellbeing.