CPI is stuck at 2.8 per cent but inflation for older age groups is higher still

16th April 2013

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The rate of the Consumer Price Index may have remained steady this week at 2.8 per cent as the BBC reports. But the rate of inflation facing older savers and investors is much higher according to research from Alliance Trust.

The Alliance Trust Economic Research Centre has found that, in March, the oldest age group – the 75 and overs – experienced the highest rate of inflation for the third month in a row. This comes despite the fact that their inflation rate fell slightly from 3.2% to 3.1%. This small decline is related to the fact that food price inflation slowed, helping to offset higher gas and electricity price inflation.

The elevated rate of inflation experienced by the elderly is partly due to continued increases in electricity and gas prices. Electricity price inflation increased from 6.4% to 7.6% last month and gas price inflation rose from 7.2% to 7.6%. Increases in these categories disproportionately affect the elderly as they allocate a higher proportion of spending to these areas. Food price inflation eased to 3.8% in March which helped to offset some of the impact from higher utility prices.

The under 30s are also experiencing a relatively high rate of inflation, at 2.9%, a slight increase from February.

In March, the youngest age group, the under 30s, saw a rise in the rate of inflation they face, from 2.8% to 2.9%. The sharp increase in university tuition fees last autumn continues to put upward pressure on the inflation rate of this age group. On top of this, inflation in the recreation and culture category rose from 1.2% to 1.8% in March. In particular, price moves in audio-visual equipment were less deflationary in March and this is an area where the youngest age group allocate a higher proportion of spending than compared with the elderly.

Chief economist Shona Dobbie says: “Our analysis shows that the over 75s continue to suffer the highest rate of inflation. The oldest households spend relatively more of their budget on basic goods and services, which have pushed their inflation rate higher in recent months. We estimate that the oldest age group spends more than 23% of their budgets on food, gas and electricity, compared with just 16% in the case of 30-49 year olds. The under 30s spend an even lower share on food and utilities, but are more affected by education and audio visual costs and therefore face a relatively higher rate of inflation.

“In addition to the large increase in education costs last autumn, inflationary pressures are currently high on tobacco, transport services and gas and electricity, adding to the financial burden facing almost all households. However, the middle age groups – the 30-49 year olds, the 50-64 year olds and the 65-74 year olds – are all currently benefiting from the fact that clothing and footwear prices are lower than a year ago, and that petrol prices have not  changed substantially over the same period. For this reason, we estimate that these age groups are all currently experiencing a rate of inflation of close to 2.4% to 2.6%, which is lower than the official headline rate of 2.8%.”

Alliance Trust gives details of its inflation calculations and the ultimate inflation rate below.

Spending Weights

Age Group Food Electricity Gas Petrol Clothing/ Footwear
Under 30 9.8% 2.3% 1.7% 5.0% 5.2%
30-49 Year Olds 11.3% 2.3% 2.1% 6.4% 5.8%
50-64 Year Olds 12.4% 2.5% 2.3% 6.7% 5.2%
65-74 Year Olds 14.2% 2.8% 3.2% 5.5% 4.8%
75 and Over 15.7% 3.7% 3.9% 3.4% 3.1%

Note: This table shows the spending patterns of different age groups across different spending categories,

Source: The Family Spending Survey: 2012 edition and In-house Analysis

Age Group Inflation Rate
Under 30 2.9%
30-49 Year Olds 2.6%
50-64 Year Olds 2.5%
65-74 Year Olds 2.4%
75 and Over 3.1%

Vince Smith-Hughes, retirement expert at Prudential said: “With inflation staying high, pensioners’ budgets remain incredibly strained. They are particularly vulnerable as they spend a proportionately higher amount of their income on items such as food and fuel which are seeing bigger price rises. Figures from the ONS show energy bills cost pensioner households an average of £1,583 per year, making it their single largest expense.

“To add to this, retirement incomes in 2013 have hit a six year low, with those retiring this year expecting an annual income of £15,300 – 18 per cent down on 2008.

“It’s important that those retiring take the impact of inflation into account when planning their future income. Contacting a financial adviser or retirement specialist is essential when choosing an annuity as the inflation risk can erode the spending power of retirement income. By getting good quality financial advice, retirees can ensure they are well positioned for retirement.”

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