Households in the top 10% by income experienced a much higher rate of inflation than the rest of the population over the past two decades, Tilney’s Household Inflation Index has revealed.

Tilney’s analysis of Office of National Statistics (ONS) data dating back to 1997 found that households with an income of over £78,500 per year – the top 10% - have seen overall inflation of 64%, while the typical income household (£26,900 – £30,000 per annum) has seen inflation of 50.7%, and the bottom 10% (less than £10,400), 53.8%.

The firm’s analysis shows that the biggest single factor influencing living standards was housing across all groups. However, disproportionate spending on education, holidays and buying homes, where prices have risen fastest, combined with lower spending proportionately on essentials such as food and drink, has meant wealthier households have experienced the greatest inflation rate overall during the last 20 years.

The spending mix of households has meant inflation has been a “game of two halves” over the last 20 years, says Tilney. Pre-recession, rapidly rising house prices contributed to the top 10% experiencing “by far” the highest rate of inflation.

Post-recession, while the top 10% benefitted from a brief drop-off in house prices from 2007-2009, lower income households became the hardest hit, due to the rising cost of utilities and food, which they spend more on proportionally than typical or wealthier households.

The launch of Tilney’s report coincides with the 20thanniversary of the Bank of England being granted autonomy to dictate interest rates as a tool for controlling inflation. While the typical household has, in an average year, experienced an annual rate of inflation of 2%, the Bank of England’s target rate, the wealthiest tenth have seen a variance of up to 0.5% higher per year.

Tilney says that the impact of inflation and its disproportionate affect on different income groups should be a key factor in the Financial Planning process if consumers are to protect their standard of living from long-term erosion by inflation.
Andy Cowan, head of Financial Planning at Tilney, said: “In this (Financial Planning) process, it’s widely understood that holding too much cash for long-periods of time is a sure way to see the real value of wealth eroded and that any investments must produce inflation-beating returns, to make them worthwhile. What fewer people appreciate, however, is that all households experience their own individual rate of inflation and this can vary greatly depending on how the household budget is spent.

“Those with children in private school will experience a vastly higher rate of inflation, as private school fees have soared four-fold in the last 20 years and show little sign of slowing. In this sense, it’s vital that households plan for a level of inflation that’s appropriate to them.

“To give an example, take someone in the top 10% of UK households by income, investing £100,000 over a 20-year period, with the aim of generating a return of 3% (net of inflation). If this household was to plan for the UK average inflation rate of 2%, rather than the 2.5% experienced by the top 10%, they would miss their saving target by £16,749.48.”

Tilney Group employs over 1,000 staff in 30 offices around the UK.