Feeling the pinch: why the cost of living rises faster the poorer you are

The official rate is only 2.2% - but it feels far higher to most people
 Cows on a farm in the Scottish Borders, look out of a pen
The cost of food has risen by 6% overall, with dairy products up 15.4%. Photograph: PA

Opening bills is never much fun. But if you are feeling more than usually anxious when the envelopes thud on to the doormat at present, then you are not alone. Everything is going up in price and by pretty large amounts. At least, that is what it feels like to most of us.

The official inflation rate crept up to 2.2% in January, according to data published yesterday, but for many in the UK, that figure will seem meaningless.

The power company E.ON announced a 15% rise in gas and a near-10% increase in electricity bills last week - five out of six of the main energy companies have now sharply increased prices this year. Rail fares rose, yet again, by an average of 4.8% this year, although some dispirited commuters are facing ticket prices that are 14.5% higher. The price of petrol has been increasing sharply, rising from 71p a litre five years ago to about 104p a litre today, according to the AA.

Even food prices are soaring due to rises in the price of commodities such as wheat. Poor harvests, rising demand from a growing global population and the pressure on land from biofuels are all adding to the upwards pressure.

Official figures put food inflation at 6.6% over the past year. Dairy prices are rising particularly quickly, with milk, cheese and eggs up 15.4% since January 2007. Meat prices are 7.8% higher than a year ago. The cost of a curry is also likely to rise as world rice prices are 60% higher than a year ago and basmati rice has almost doubled.

As stockmarkets crash and pundits debate whether Britain is heading for recession, many people might think they are already in one. Figures from the Office for National Statistics show that average wage growth fell behind inflation in seven months of the past 12 - the first time that has happened in successive months since 1995.

The government's preferred measure for inflation is the Consumer Price Index (CPI) - the 2.2% figure. If mortgage payments and council tax are added, you get the Retail Price Index (RPI), which is used in most wage negotiations. At 4.1%, this figure is still low by historical standards. So what is causing the gap between the official figures and most people's perceptions?

The ONS works out the CPI figure by tracking the prices in a basket of 650 goods and services. The statisticians attempt to draw a picture of what a typical person in Britain might buy and work out an average level of inflation. Each year the items are changed to reflect the shifting tastes: in came champagne and MP3 players in 2006, out went slippers and chocolate biscuits.

For many years now, inflation has been kept low by the "China effect": as parts of the developing world, with their lower wages, have become the world's factories, so prices of clothing, electronics and other goods have fallen, offsetting increases in the cost of transport, energy and education. But not everybody will be facing the same rate of inflation and with current trends, it is people on lower or even middle incomes who will be finding themselves under the most pressure. The reason is fairly obvious: people with less money spend a disproportionate amount of their income on basics such as food, energy, petrol or public transport - where prices have been going up. They are not benefiting from lower prices in items such as new home appliances, electronics or clothing.

A recent report from Ernst & Young said that just 22% of a typical household's monthly income was left over after taxes and essential bills had been paid, down from 28% in 2003.

"I think people are feeling under real pressure," said Martin Lewis, who runs the website moneysavingexpert.com. "I always laugh at inflation figures because it is all very well to say 2.1% or 4%, however you measure it, but there is no such thing as a standard pattern of spending. It is all very well that inflation is brought down because the price of plasma TVs has halved but if you are struggling to make ends meet that isn't going to help you that much.

"The richer you are, the lower the personal inflation you've got; the poorer you are, the higher personal inflation you've got," he said.

For people on the bottom of the ladder, the strain might be worsened further by being forced to shop for food from more expensive local shops because of lack of access to a car, or by paying more for home energy because they are forced to use pre-pay meters.

The accountancy firm Grant Thornton warned earlier this month of a likely steep rise in personal insolvencies this year, particularly as many people come off cheap fixed-rate mortgages. "From here on in, it's going to be a rough ride for many individuals," said Mike Gerrard, head of personal insolvency.

Mervyn Kohler, of Help the Aged, said many pensioners were especially vulnerable. "A lot of older people still look at the way their state pension increase goes up in line with the RPI, - it is going up £3.40 to £90.70 a week in April - and they say what else has actually gone up by that miserable amount? I am absolutely convinced that there are people out there turning off their heating.

"There is a bit of a fear factor: will I have enough money to keep myself afloat at the end of the week?" he said.

Things are not about to get any easier. Factory gate inflation - the price of goods before they reach the shops - is rising at its fastest annual rate in more than 16 years. It reached 5.7% in January, driven by record prices of oil and raw materials.

Analysts warned that the rise in utility bills, not captured in the January figures, would push the CPI rate higher.

The undercurrents below the top-line inflation figure are only consolidating the widening wealth gap in Britain. Salaries for the wealthy outstripping the national average, boardroom pay at Britain's top companies soared 37% last year, according to the most recent Guardian pay survey. But in addition to that, those fortunate enough to spend a lot of their money on gadgets, refurbishing their homes, designer clothes and holidays are also enjoying the benefits of a cost of living that is only inching up.

A common complaint among the middle classes has been inflation-busting increases in the cost of sending their children to private schools and university; the latest CPI figures said education costs are 13.2% higher than a year ago.

The group facing the lowest increases in their cost of living are young professionals, still living with their parents. Most will be paying a nominal, stable amount of rent and spending the rest of their cash on things for which the prices have been going down in real terms for some years, such as CDs, clothes, iPods and going out. According to HMV, the cost of a chart CD has fallen from £12.99 in 1998 to £9.95.

Case studies

We asked four sets of people in very different circumstances to work out how quickly their cost of living is rising, using the personal inflation calculator on the ONS website. The present national average is 4.1%.

The questionnaire uses the Retail Prices Index (RPI) figure. It includes mortgage payments but not the latest increases in energy costs.

The family

'I might switch energy suppliers again - just on principle'

Julie Hogben, 40, and Barry Mellor, 45, personal inflation rate 11.1%

Julie Hogben, who looks after her two children in Windsor, had been considering switching her gas and electricity supplier for some time as she noticed the bills creeping up.

Towards the end of last year, a saleswoman from npower knocked on her door and explained that not only was her company one of the cheapest, it did not keep changing its prices. Hogben signed up. The letter confirming she had switched arrived on January 5 - the same day that she read in the newspaper that npower had put its prices up by 15%. It was the first of the energy firms to move in the current round of price rises. "I am going to wait and see what the others do, but I might switch again, just on principle," Hogben said.

Hogben lives with her partner, Barry Mellor, a purchasing manager at the mobile phone firm 02, and their children, Jim, four, and Lucy, 18 months. According to the personal inflation calculator, they faced inflation from 10% to 12.8% in the past year.

The couple began living together three years ago, in a new home with new appliances. They both brought furniture with them, so in recent years they have made few of the big purchases that might have brought their inflation rate down, except for an iPod, vacuum cleaner and small TV.

"I have been aware of prices going up and have tried to be more careful," Hogben said. This year, instead of two weeks in Devon on holiday, the family is cutting back to one week. Their son Jim gets a free nursery place in the mornings but Hogben no longer pays to keep him there all day once a week. "It wasn't just because of the money but that was part of the decision."

She has also been trading down in some food shopping. It used to be all on Ocado, the Waitrose website, but increasingly she uses Tesco.com.

The pensioner

'It's hard at the moment, but I think it will get even worse'

Stan Peverley, 75, personal inflation rate 4%

Stan Peverley lives in Redcar & Cleveland, and receives £227 a week as his pension. His average inflation rate over the past year has been 4%. While this is in line with the national average, it has fluctuated greatly. At the start of 2007, Peverley faced a personal inflation rate of nearly 10%, twice the average.

The fall in gas and electricity bills towards the end of last year has helped pushed down his cost of living but it can be expected to rise again after increases in energy costs. "Especially with the cold weather lately, I find that I'm having to pay an extra bit more, so it works out about £110 a month," he says. "My phone bill has also gone up, I pay about £10 a week."

Peverley says many of his friends are also struggling with rising price pressures and are worried that the increases in council tax will squeeze their spending even further. Transport costs are another worry for Peverley. Although he is entitled to free bus travel, he finds he has to pay peak fares or rely on taxis to get to early hospital appointments.

The way he shops for food has also changed recently due to rising food prices. Peverley says he used to enjoy doing a weekly shop but found he ended up spending over £20 when he went to buy just 10 items. He particularly noticed that the price of eggs and milk has gone up. He now shops at Iceland and buys in bulk. He says it has had an impact on his diet since he has less choice over what he eats.

"It's hard at the moment, but I think it will get even worse. I know the cost of public services needs to be kept low, but people have to be able to live. Going into a home is not an option for everyone because the prices are sky-high and you can't really cope."

The dotcom couple

Jamie Riddell, 33, personal inflation rate 2.6%

Jamie Riddell is a self-confessed gadget freak. Last year, he bought himself all three main games consoles. He has an iPhone and plasma TV and treated himself to new speakers for Christmas. He tends to spend £50 to £100 a month on music. His latest gadget is a Nabaztag, "an utterly pointless" talking rabbit that connects to your Wi-Fi network to relay headlines, share prices, weather reports or emails. His other big outgoing, he says, is travel.

Riddell and his wife Katherine founded an internet marketing agency called Cheeze.com in 1999. They suffered a number of lean years when companies turned their backs on internet advertising, but stuck with it. They sold the business last year to a group called DMG. They live in Suffolk and now own their home outright.

The couple tend to shop for local produce where possible and at farmers' markets. The relatively low proportion of their income that goes on food, energy and public transport, plus the fact that they don't have a mortgage, has helped keep their personal inflation rate below the national average.

The biggest price rises Riddell has noticed are fuel. Filling the tank of his Lexus RX400, a hybrid 4x4, used to cost about £45, but is heading to £60. "When you are doing that at least once a week you start to notice."

The couple's home in the country is powered by oil, and the tank recently cost £880 to fill. "That caused a sharp intake of breath." The tank is supposed to last six months, but the dial suggests 10% has been used in a week.

School fees for their eight-year-old are also soaring, something that has led the Daily Telegraph to complain of middle-class inflation. "They are going up at a scary rate," Riddell said, "but it is a fact of life."

The single woman

'A lot goes on buying clothes'

Tasha Thambirajah, 24, personal inflation 1%

Tasha Thambirajah
Photograph: Sarah Lee
Tasha Thambirajah is a finance accounts officer. She earns £22,500 a year and lives at home with her parents in south London as she saves to buy a house. She does not pay rent. Her personal inflation rate is just 1%.

Out of her monthly salary, she puts aside £700 towards buying a house. Her biggest costs are transport and phone bills, which come to about £150 a month.

"I am lucky at the moment because the rest I am able to spend on me," she says. "I eat out a lot and so probably spend about £100 a month on this and the same or a bit more on going out. I love to shop so a lot of my money goes on buying new clothes and shoes."

However, Thambirajah says she finds its hard to see her cost of living falling and her budget varies from month to month. She says she finds eating out

is getting more expensive and while there have been big price cuts on the high street, most of the new items she buys are not on sale. Thambirajah has also noticed her transport costs building up, especially during the weekends when she travels around more.

But she acknowledges that some areas of her spending have got cheaper. She used to spend a large chunk of her income on CDs and DVDs but downloads a lot more now.

Thambirajah is worried that her low cost of living will not last much longer once she has moved out. "It will get worse for me. I won't have any spare income to spend on myself."