I’ve been thinking a lot about inflation lately.
We’ve heard a fair bit about how inflation has been on the rise and is therefore squeezing the ‘middle class lifestyle’ and how this is just not fair.
But something amongst all of the headlines didn’t quite sit right with me so I thought about it for a bit, and I fired up the internet to do some research. I did some reading and learned about the history of, and the differences between, the different types of inflation. But in the process of learning about CPI and RPI inflation, the differences in what constitutes the baskets of goods, and the weightings that are applied, I couldn’t get away from my core idea, which is this:
I’m not ready to worry about inflation yet.
Hang on a minute, I hear you say. Of course you should worry about inflation. If prices go up, then you need more money to live and therefore you need to save more to be able to live off the passive income that money produces. Everybody who uses money in exchange for goods and services needs to worry about inflation, don’t they?
Now I’m just about old enough to remember inflation at double figures and respectfully submit that at those levels, I might think differently. But here’s another way of looking at inflation in the current climate.
I believe that I have a lot more optimising to do before I earn the right to worry about inflation at its current rates.
What the fuck are you talking about? I hear you ask. Well, let’s illustrate what I’m talking about with the help of our hero for today, Derek, and his simple case study.
Derek is annoyed that his favourite coffee shop Costalot Coffee has put the price of a regular MochaChoccaChino up from £1.95 to £2.05. Derek’s advanced maths skills tell him that this represents a %5.1 price hike.
Now Derek’s a sensible chap who doesn’t spend money every day on a coffee from Coastalot, but he gets one every Monday to ease himself into the week and pops for a coffee with a mate from work a couple of times a week. He’s a busy guy and often gets lunch in Costalot where he really likes the chicken salad. He’s just noticed that the salad has also gone up, this time from £4.50 to £4.75 (a 5.5% rise).
So, he has a choice.
Option one: He gets to be a victim of inflation “look how these prices are creeping up. I can afford it because it’s only a few pennies here and there, but I am officially a victim if inflation, just like The Newspaper told me I was”.
Option two: Take control. Cut down on coffee and chicken salad purchases from Costalot coffee.
Derek does some financial modelling sums and works out how his finances would be affected if he reduced the number of times he purchased coffee and chicken salad in Costalot. He doesn’t want to dramatically change his habits so he bases his computations sums on having three (instead of four) coffees and three (instead of four) chicken salads per week at work.
Derek regards this slight reduction in Costalot consumption as achievable, and is happy that the small change – should he implement it – won’t mark him out as some kind of floppy-sandwich-in-a-cling-film-wrapping kind of guy which let’s face it – is not the guy his wife married, and he simply doesn’t often have the time to make a good lunch before heading off to work (the kids demand a bit of attention and he’s happy to give it)
His analysis sums reveal the following:
- Pre inflationary price hike: (£1.95 x 4 per week) x 47 working weeks = £366.60
- Post inflationary price hike: (£2.05 x 3 per week) x 47 working weeks = £289.05
Chicken salad bill:
- Pre inflationary price hike: (£4.50 x 4 per week) x 47 working weeks = £846
- Post inflationary price hike: (£4.75 x 3 per week) x 47 working weeks = £669.75
Coffee and Chicken salad bills combined
- Coffee and chicken salad bill (pre inflation) per year: £846 + £366.6 = £1212.6
- Coffee and chicken salad bill (post inflation) per year: £669.75 + £289.05 = £958.8
Our hero, Derek likes the maths. He accepts that there’s an opportunity to save money in Costalot without banning himself from there forever and driving a wedge of weirdness between him and his work friends. He likes the maths so much that he wonders where else he can optimise. He knows that on its own, reducing spend in Costalot won’t change his life, but that a series of small wins can roll up to make a big difference.
Next week, he pops to Lidlers for the family weekly shop instead of Waitrhodes. He saves a bit and is more than happy with the produce.
Derek’s got a bit of a taste for this now. Instead of just accepting his new car insurance quote (up by a wopping 18%) he spends 1.5 hours shopping around and actually cuts his car insurance bill vs last year’s. He quite enjoyed that one – saving money and sticking it to the corporates was rather fun!
Derek is feeling pretty positive about all of this. He’s read the headlines about stuff getting more expensive, but he’s decided not to be a victim. With a little bit of mindful action, he’s actually bucked the trend and cut his spending in some areas. He’s not morphed into some kind of hermit; he’s not yet feeding himself and the family by foraging for berries and he still takes the bus to work. The kids still go to parties and clubs and are accepted by society just as they always were.
All that’s changed is that Derek’s realised that he doesn’t have to automatically be a victim of inflation. Yes, Derek knows that the price of things is going up, but by shopping and consuming just a little bit more wisely, he’s actually cutting spending.
He’s decided that he’s got plenty more optimising to do before he can blame his financial situation on inflation.
He’s not gonna go mad, but on his list for optimising a bit for next year is:
- Could he use a bit less petrol?
- Is it time to quit smoking?
- How about running to work a couple of times a week?
- What’s the maths of investing in a good coffee contraption at home and reducing the Costalot coffee bill a bit more?
- What if he did a bit more home cooking and cut down on takeaways?
- That shirt is pretty nice, but so was the one he bought last month and hasn’t worn yet.
- Is it time to change gas supplier?
- How about hosting some families for Sunday dinner instead of going to the pub down the road for a pretty average Sunday roast at £16 per head plus drinks.
I think that most of us can learn a bit from Derek. Until the time comes when life , spending and decision-making is optimised fully, then we’re letting ourselves down by blaming our financial situation on inflation.