The rich have continued to experience a higher rate of inflation than that experienced by the UK population as a whole according to the latest iteration of the Coutts Luxury Price Index (CLPI).
The Consumer Price Index (CPI), which measures the general level of UK inflation, increased by 2.4 percent over this period.
But the CLPI, which tracks a “basket” of 142 goods and services across 12 categories typically consumed by the rich grew at 5.5 percent.
A rich person that spends 50 percent of his/her money on luxury goods will be exposed to an inflation rate of 2.9 percent, a rate 20.83 percent greater than the CLPI.
This has obvious consequences for asset allocation, especially for those that rely upon accumulated capital to fund current expenditure. They will either require a much higher return from their assets to maintain the integrity of their capital or reduce their spending, especially on luxury items.
“Inflation in luxury goods is still much higher than the average return on cash, and is likely to remain so for the foreseeable”, said Sven Balzer, Coutts’ head of investment strategy.
“Although cash has its place in a portfolio - it has low risk and is usually easy to access in the short-term - anyone intent on maintaining the spending power of their wealth in the long term should consider a diversified portfolio alongside cash holdings.”
Coutts also point out that the inflation rates typically experienced by the rich vary by age, although this may depend on specific lifestyles and the associated spending patterns of each individual or family.
People in the 20s generally experience the highest inflation rate but rates appear to decline thereafter.
All this can add additional complexity to an asset allocation. But this could possibly be mitigated by using needs-based approaches.