How to get a step ahead of rising living costs

The median household disposable income in the UK was £32,300 in the financial year ending 2022, and this is predicted to fall by 6%, or £1,938, in the coming year or so.

"There’s no way to sugar-coat it: the cost of living hasn’t been this high since the 1980s, as inflation has been pushing up prices for everyday essentials. Although overall inflation has cooled in 2023, food prices have been rising faster than they have for the past 40 years,” says Annabelle Williams, a personal finance specialist at the savings and investment company, Nutmeg.

Understanding different inflation measures

There are two main measures of inflation on the cost of living: the retail price index (RPI) and the consumer price index (CPI). The Office for National Statistics publishes both monthly.

The CPI measures the change in the average price of a “basket” of around 700 goods and services bought by the average consumer. The RPI, on the other hand, measures consumer price inflation of those retail goods and services, plus mortgage interest rates and rent, which means it has historically been higher than CPI.

The government tends to link its budget spending to the CPI rate. This means government spending on items such as the state pension and statutory sick pay does not always align with the true cost of living.

The impact on pensions varies depending on whether they are tied to RPI or CPI. Williamspoints out that individuals with pensions linked to RPI have historically received higher annual increases to their payments than those linked to CPI.

Whichever way you measure it, the cost of living is going up. Our experts offer their tips on how to reduce this impact:

Fix your mortgage

“If you have a tracker or variable-rate mortgage that’s coming to the end of its term, now may be the time to consider switching to a fixed-rate deal. Double check the features of your current deal versus a new one before deciding to switch.”

Annabelle Williams, personal finance specialist at Nutmeg

Buy in bulk; sometimes it pays off

“If the price of items goes up over time, buying large quantities at one point will save money in the long run, even if you spend more than you want to right now.”

Ryan King, founder of Making Money Simple

Fine-tooth comb your statements

Question every Direct Debit. “For instance, not auto-renewing insurance, or mobile phone contracts, and with utilities there could be room to negotiate with your existing suppliers. Don’t automatically do anything. Think it through first.”

Simonne Gnessen, Wise Monkey financial coaching

What can you do about rising energy costs?

"In the current energy climate, sticking with a variable-rate tariff is likely to be the best option for many. This is because the energy price cap limits how much suppliers can charge customers on variable tariffs, but the cap doesn’t limit how much suppliers can charge for fixed tariffs. Right now, staying on a variable tariff is likely to be the cheapest option. However, this situation can quickly change, particularly when the new price cap is in effect, so make sure you research what fixed-rate tariffs are available on a regular basis to see if there are any that offer a good deal."

Rhiannon Philps, Personal Finance Expert, at Nerdwallet

Monitor your spending

“There are now plenty of personal finance apps available that allow you to track your spending. These can help identify unnecessary spending habits and pinpoint where price rises are hurting most. This can be particularly useful as you reach retirement and undergo a lifestyle change.”

Gavin Haynes, investment consultant and co-founder, Fairview Investing

"Mortgage repayments are the biggest monthly outgoing in many households, or the second-biggest after childcare costs. Interest rates for remortgaging and new borrowing have risen as the Bank of England has raised its base rate to a 15-year high. People with fixed-rate mortgages coming to the end of their term should check rates frequently and consider how a mortgage broker or independent financial adviser might help to ensure they get the best rate. Double-check the features of your current deal versus a new one before making the decision to switch.”

Annabelle Williams, personal finance specialist at Nutmeg