Table Of Contents
What Is Inflation And What Does It Mean For Me?
Last Updated on: February 28th, 2025
| Key Takeaways:- • Inflation is the measurement to see how fast the cost of goods and services rises. • Inflation is broadly classified into three types – cost-push inflation, demand-pull inflation, and built-in inflation. • The commonly used inflation indexes are the Wholesale Price Index and Consumer Price Index. • Inflation can be seen as both positive and negative depending on the individual’s vantage point and rate of change. • Individuals with tangible assets may like to see inflation as it increases the value of the assets. |
Over the past ten years, I have been shopping at the same supermarket, and my husband and I have maintained the same diet as a couple. A decade ago, we could do our monthly grocery shopping for £100. In 2025, this amount barely suffices for our two-week requirements.
Let’s look at the price of one staple to understand the price rise. A decade ago, a dozen eggs cost 81.7 pence, while in the post-COVID era, the price stood at 88.5 pence. In 2025, you now pay almost £1.5 for a dozen eggs.
Earlier, it was possible to save some of your income even after necessary expenses. However, the increasing inflation had a massive effect on our household expenses, negatively impacting our savings.
But what does this really mean in the long run?
Let’s find out.
Understanding Inflation
Inflation refers to the increase in the price of goods and services over a period of time. As of December 2024, the UK’s inflation rate stands at 2.5%, which is higher than the Bank of England’s 2% target.
A higher inflation means regular consumer costs increase, which can put immense pressure on the economy. At an individual level, it impacts our spending capacity, cost of living and savings, leading many to rely on credit sources like Credit Cards, £500 payday loans, Buy Now, Pay Later Schemes, Bar Credit Loans and more.
Inflation is caused by several factors, both at the national and international levels. Some of the common reasons behind the UK’s inflation are:
- Rising energy costs due to international wars and strifes
- Labour shortage after the pandemic
- Government legislations
- Brexit adjustments and impact
- Depreciation of the pound
Types of Inflation
Over a longer period, inflation generally speaks to sustained increases in prices of goods and services falling short of the rising fall in the value of money. It is caused by several factors attributable to the type of impact, timing of action, or impact on the economy.
As I have said earlier, Inflation can be broadly classified into three types, they are,
- Demand-Pull Inflation
- Cost-Pull Inflation
- Built-In Inflation
1. Demand-Pull Inflation
Demand-pull inflation occurs when the economy’s overall demand for goods and services exceeds its available supply. Prices cannot meet demand at various levels of productive capacity within the economy.
Demand-pull inflation may result from consumer spending, government spending, a specific company’s capital investment or different sets of events combined.
For example: Growth of government investment in infrastructure will create increased demand for raw materials, labor, and other services that will drive up prices.
2. Cost-Pull Inflation
Cost-push inflation will occur after an event, pushing the conditions upward in production.
The passing on of the additional cost of production to consumers has been made real, as indicated by the production costs.
The major factors where cost-push inflation is treated include massive wage increases, the cost of imported raw materials like oil, and the taxation of some goods.
For Example: An increase in oil prices will raise the cost of transportation for goods and services.
3. Built-In Inflation
Built-in inflation is a working wage-price spiral, which occurs as higher pay demands from workers in response to rising living costs become the resultant effect of firms raising prices to cover wage bills.
Built-in inflation refers to how increases in wages lead to increases in prices, which demand further increases in wages, and so on.
For Example: Inflation increases the cost of living, which would further translate to demands for higher wages by workers; to address the increased labor costs, firms would raise their prices, causing further inflation.
How is Inflation Impacting Everyday Life?
As we deal with inflation, there’s only one question on everyone’s minds—how will this affect me?
Many British households are struggling to afford even the basic necessities. Somehow, even with side incomes and limited expenses, financial flexibility feels tighter than ever. Let’s explore some ways that inflation may affect our everyday lives.
Higher Cost of Living
Despite curtailing on wants, the costs associated with our needs have skyrocketed in the last few years. The cost of energy bills, insurance and other utilities has increased significantly over the last few years, putting immense strain on our income.
Many people have planned to retire early and follow their passions; however, with the current financial circumstances, that dream is fading fast.
Impact on Purchasing Power
Inflation directly affects purchasing power, meaning the money in your pocket doesn’t stretch as far as it once did. Everyday expenses are becoming more and more difficult to pay for as the cost of necessities like food, fuel, rent, and utilities keeps rising.
For example, a weekly grocery shop that once cost £50 may now set you back £65 or more, forcing families to cut back on non-essentials or seek cheaper alternatives. Similarly, rising energy costs mean higher household bills, leaving many struggling to balance their budgets.
Higher Mortgage
Inflation has significantly impacted mortgage costs across the UK, making homeownership more expensive than ever. As inflation rises, so do the interest rates, which in turn drive up mortgage repayments for homeowners with variable or tracker-rate mortgages. Many borrowers who previously enjoyed low-interest rates are now facing substantially higher monthly payments, putting a strain on household budgets.
Low Savings
For those who were previously able to set aside money regularly, inflation has forced a shift in priorities. Instead of building an emergency fund or contributing to future investments, more people are using their savings to cover everyday expenses. This makes long-term financial security harder to achieve, leaving individuals vulnerable to unexpected costs.
Additionally, inflation reduces the real value of savings, meaning that money sitting in a bank account today may have less purchasing power in the future.
Pros and Cons of Inflation
Here are a few pros and cons of inflation that you should know about,
| Pros | Cons |
| It increases the resale value of assets. | The cost of goods and services increases. |
| Inflation encourages spending on the optimum level. | High prices are imposed on the economy. |
| The prices for certain goods increase first, then the others. |
What Can You Do?
The rising inflation and cost of living crisis in the UK have put a lot of financial pressure on people. Here are some ways you can deal with this.
- Budget Wisely: Track your spending and prioritise essentials over non-essentials.
- Reduce Energy Costs: Switch to energy-efficient appliances, apply for grants, and compare suppliers.
- Review Debt & Loans: Look for lower interest rates and consolidate debts where possible.
- Seek Government Support: Check eligibility for benefits, energy support schemes or council tax reductions.
In Summary…
One lesson to learn from the rising inflation and cost of living crisis is how important it is to have financial knowledge and budgeting skills. Following a budget and proper income allocation will allow you to save (though not at the same rate as before) and invest for the future.
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