Generation Inflation debunks silver inflation phenomenon
The official inflation figures, published each month by the Office for National Statistics, provide a useful average, but hide a range of real life experiences.
We have often seen people in later life experience a higher rate of price inflation than younger people.
This phenomenon is known as ‘silver inflation’ and reflects the nature of the goods and service typically consumed by older people, which tend to rise faster in price.
Despite widespread acceptance of silver inflation, and the importance of planning for this when creating an income in retirement, younger people might now be facing a similar challenge.
According to new research from Fidelity International, millennials suffer greater inflationary pressures than any other generation, with their actual inflation rate three times higher than retirees and almost double the UK’s average inflation rate.
Millennials are the cohort who reached young adulthood around the year 2000, at the turn of the millennium.
The analysis from the first of Fidelity International’s generational inflation series digs deeper into the real inflation rate facing different generations across the UK.
In the 12 months from March 2015 to March 2016, under-30s suffered a real inflation rate of 0.9%, compared to 0.4% for both the Gen X (30 – 49 years old) and Baby Boomer (50 – 64 years old) generation, and 0.3% for those over 65.
According to Fidelity, this has been the trend since September 2014, with other generations tracking the average UK inflation rate more closely.
Fidelity explain that the under-30s spend proportionally more on dining out, smartphone and Internet subscriptions, rent and household bills.
However, education is their biggest weekly expense and this is significantly driving up their average cost of living.
Millennials prefer spending on unique experiences, so unsurprisingly a bigger chunk of their income (14%) is spent on dining out and experiences with only 8% spent on groceries and soft drinks.
Consequently, this generation has not benefited from the massive fall in UK food prices driven by the ongoing supermarket discount price war.
The younger generation also spend proportionally more on housing (19%) than any other generation, battling the high cost of renting and the struggle to get a foot on the property ladder.
In contrast, retirees (those over 65) spend a bigger slice of their income on categories that experiencing lower inflation like food and non-alcoholic drinks.
Indeed, the spending of this group is the mirror image of those under 30 with no education costs and less spent on dining out.
According to Maike Currie, investment director for personal investing at Fidelity International:
“The headline inflation rate tells only half the story.
“On the surface it may look like the cost of living has barely increased over the last year, but scratch beneath the surface and there is a clear generational divide when it comes to the cost of living.
“Millennials can be dubbed ‘Generation Inflation’.
“Our analysis shows the current rate of increase in the cost of living is three times more for millennials than it is for retirees, with those under 30 spending a greater proportion of their income on the areas which have suffered the highest price increases – education and housing.
“This leaves them with little left to save and the challenge of generating higher returns to keep up with the pace of inflation.
“Unfortunately for millennials this challenge is being met with equally low wage growth – wages remained below their pre-crisis average in 2015 despite unemployment falling back which means this group is also hit by negative real earnings growth.”
This research from Fidelity International is an important reminder that official price inflation figures should only be treated as a starting point when making assumptions about price changes in the future.
When constructing Financial Plans for our clients, we always consider what would be a reasonable inflation assumption for the future, based not only on past experience of price inflation but on the types of goods and services consumed by that specific client.
Price inflation erodes our purchasing power, especially over long periods of time, making it important to factor in a reasonable assumption and consider how inflation might impact upon our ability to achieve our goals in life.