Money Times: Help is available to inflation proof your cost of living

“The inflation rate is determined by a basket of goods nobody buys,” is a pretty good summary of the lack of credibility that this common price indicator commands.

The cost of living for one family will be very different from another, while the lifestyle and expenses of the young worker who is a renter and commutes to work on public transport, couldn’t be more different to that of a homeowning pensioner.

Yet, if the current CSO cost of living index is to be believed, the annual inflation rate in Ireland is still just 1.6%, but has doubled since 2019.

Rising inflation is now a source of real concern among some economists, especially if it spurs on higher wage demands to meet higher prices. Inflation that gets out of control – some readers may remember the 1970s and 80s – can usually only be reigned in with higher interest rates and less government ‘stimulus’ and spending.

Given that so many large public companies – about one in four listed on the US stock markets – are only able to repay the interest on their loans with more borrowing. Tightening of the money supply and increasing interest rates by central banks may deal with rising inflation, but it would cause a bankruptcy domino effect that would devastate stock markets and the wider economy.

Higher prices – and low interest rates – are more likely, at least until we see the full effects of the post pandemic spending spree. Meanwhile, we can move to inflation-proof our personal standards of living.

“The most obvious way to keep ahead of inflation”, says my financial planner, Marc Westlake of Global Wealth Management, “is to earn more in order to keep up with rising prices. Is it possible to move job or even to retrain in order to earn more money?” People need to check that they are not paying too much tax, he says, and ensure they are collecting all their state benefits and tax relief.

“The only place to save and earn interest that just about matches the official CPI is State Savings,” says Westlake. These tax exempt products “are usually for a fixed term, but you can access your money without penalty if you give seven days notice. It’s the best option for your emergency or contingency funds as well.”

Our biggest expenses, like rent/mortgage, food, utilities, insurance, health care and transport which are much higher than the official CPI rate need reviewing too and you can do this with the help of easy-to-use comparison sites like the state consumer service at www.ccpc.ie, at www.bonkers.ie and www.switcher.ie. In the case of utilities like gas and electricity and some companies raising their prices up to three times and average costs for householders expected to be at least €200, switching providers typically saves c€400, according to bonkers.ie. Broadband and mobile phone price hikes can also be tracked on these sites.

Meanwhile, surveys show that mortgage holders can typically save c€2,000 a year if they switch providers though they should always approach their own lender first to save on transfer costs. (Tracker loan holders should never switch product or provider if it means giving up their tracker.)

A good general insurance broker is a godsend for tracking down cheaper and suitable motor and home insurance. They will often rebate part of their commission for new customers. Then look for a cheaper petrol station in your area. In my neighbourhood there is a 10c a litre price difference between stations less than a half a mile apart.

For a modest fee, specialist brokers like Dermot Goode of www.totalhealthcover.ie can review your entire family’s private health cover and save you hundreds of euro if you haven’t switched over the past two years.

Finally, an independent, financial planner/adviser can review the price of all your protection policies and help inflation-proof your investments, especially tax-efficient pension funds.

“No one can accurately pick and choose winning stocks. It is a guaranteed, long term way to lose money, says Westlake who says he is concerned about rising consumer prices. “No-one can accurately predict exactly how markets will perform in the next few years or decade.”

However, he insists that a reliable way for the value of your pension fund or pension income to modestly exceed the official CPI rate and hopefully your own personal inflation rate, is to create a balanced, diversified pension portfolio of assets that includes lower risk, less volatile, short term (two or five year), government bonds.

If bond prices fall, he says, the yield (interest) you get will rise. If the price of your short term bonds goes up, then your pension fund will benefit when the bonds mature on a rolling (usually) two to five year basis and the money is reinvested.

Inflation has been slowly devouring the spending value of our cash savings. Now it’s eating away at our spending power.

Caveat emptor…carpe diem. Time is not your friend.