Why keeping your household budget updated matters more than ever in age of inflation: Sarah Coles

Prices haven’t risen uniformly. When you dig into the basket of goods that makes up the CPI index, some rises have been spectacular. Olive oil is biggest offender, having increased in price by 116% in five years after some poor harvests. Looking across the other food items in the basket, chocolate prices have risen over 51% in the past five years, takeaway prices are up 38% and beer 23%.

Energy prices were the biggest initial shock for many households, with prices rising immediately following the Russian invasion of Ukraine in early 2022. Energy costs have fallen back from when gas prices topped out at the start of 2023. However, gas is still 63% higher than five years ago and electricity is up 41%.

Any homeowner with a mortgage will have faced eye-watering cost increases over the past five years. While this measure sits in the RPI basket of goods, rather than CPI, the inflation rate for mortgage interest costs over the past five years is a staggering 152%. The average two-year mortgage rate for a homeowner with a 10% deposit has risen from 2.79% in July 2021 to 5.07% in July this year, according to Bank of England data. However, it peaked at over 6.5% during that period – so homeowners faced a lottery of when they remortgaged as to how much pain they felt.

This data isn’t just a useful indication of why money is so tight. Understanding how much the price of essentials has risen is also key to financial planning. At the heart of any financial plan is a household budget of everything you have coming in and everything you spend. The aim is to get both sides to balance – with some left over to cover your key priorities. If you haven’t updated your budget for years, there’s every chance the spending side has shot up far more than you expected, so you run the risk of overspending each month or having nothing left over to help you build for the future.

The price of the essentials matters when you’re planning ahead too. When you’re working age, it makes sense to work towards an emergency savings pot that’s big enough to cover the cost of essentials for 3-6 months – and when you’ve retired this typically expands to 1-3 years’ worth. It means you need to have up-to-date prices in order to set your savings goal. When prices rise, your savings pot needs to grow too.

Likewise, keeping across rising prices helps when you’re planning your retirement income. Some people will want to ensure they have a guaranteed income for life to cover the essentials, through things like the state pension, defined benefit pensions and annuities. Then they use drawdown to give them flexibility over the income they have for the nice-to-haves in retirement. If they haven’t revisited the cost of the essentials for years, they may be seriously underestimating how much guaranteed income they’ll need.

If you’re already drawing an income from your pension, the impact of these price rises will depend on what your income is made up of. The state pension has actually risen faster than price inflation. In August 2021 it paid £179.60 a week, whereas now it has risen to £241.30 a week – up just over 34%. If the state pension makes up the bulk of your income, money will be tight, but life won’t be getting any harder.

Similarly, if inflation-linked pensions, annuities or drawdown make up the bulk of your income, there’s a decent chance it kept up with inflation. For those with flexible income from a drawdown arrangement, the value of their pension investments will have fluctuated but strong market returns over the period ought to have offered good protection against rising prices.

Meanwhile, anyone whose retirement income is dominated by income from a level annuity, where the income is fixed rather than tracking inflation, will have faced a painful financial squeeze. For example, someone with a £10,000 annual annuity income wouldn’t have seen the payments change, but their money would be spread far more thinly, because £10,000 had the spending power of just £7,770 in August 2021. It’s a demonstration of the devastating impact of inflation on level annuity incomes, which is particularly alarming given that around four in five annuities bought in 2025 were level.

It means we need to take stock regularly, so we don’t lose track of the cost of essentials and can plan effectively to cover them at any stage of life. It can be a good idea to keep the receipt from a big shop and use it as the baseline for comparisons six months later. It also makes sense to check your monthly bills regularly, so you can plan for price rises. That way, twice a year, you can ask yourself if you need to tweak your budget, add to your savings, or reconsider your retirement spending.

The good news is that this process might actually reveal where things that have got cheaper. Over the past five years, for example, computers have fallen in price by about 25%, camping equipment is down around 6% and mobile phones 5%. It’s a small silver lining on a very large inflationary cloud, but when you’ve been worrying about price rises for five years, you’ll take a tiny glimmer of good news wherever you can get it.

Premium Bonds

NS&I is pulling out all the stops to hit this year’s fundraising target. It has hiked the prize rate on Premium Bonds again - from 3.8% to 4.35% in September.

Premium Bond holders will be delighted with the second hike in two months. It’s a decent jump, and is accompanied by a shortening of the odds. For those who have stuck with the bonds through thick and thin, they’ll be grateful things are getting thicker.

Of course, it doesn’t change the fact that in an average month the average bond holder will win nothing, so will lose money after inflation, so if you need to hang onto your spending power, you may prefer the certainty of a savings account.

The other bit of good news is that NS&I also increasing the rates for direct saver and income bonds and raising the rate across all terms for the British Savings Bonds just a few weeks after they last rose in late July.

It’s getting unusually competitive in the short-term fixed rate market – offering 4.82% over one year, at a time when the best deal is 4.85%. Given that this is the most popular term to fix your savings over, it’s clearly hoping to persuade rate-chasers to make a small compromise in order to secure a rate that’s 100% backed by the Treasury.

There are better deals on offer elsewhere – especially if you are fixing for longer – so if the rate is the most important thing to you, you can find a more rewarding home for your money. However, getting so close to the most competitive deals could be enough to tempt some savers into the NS&I fold.