Inflation Hits 9.5% For The Wealthy

Coutts & Co launches first UK-wide ‘Wealth Inflation Index’ - Report reveals spending habits of the wealthy

- Full report available at www.coutts.com/wealth-inflation-index -

12 February 2008: Coutts & Co, one of the UK's leading private banks launches one of the most comprehensive studies into the spending habits of the wealthy in the UK and reveals that in the past year, inflation for premium goods and services consumed by high net worth individuals (HNWI) in the UK reached 9.5%, four and a half times the 2.1% inflation rate indicated by the CPI over the same period.

The Coutts Wealth Inflation Index (CWII) is based on the spending habits of the holders of Coutts’ exclusive World Card*, covering high income households whose expenditure is likely to be excluded from the widely accepted CPI and RPI inflation trackers. The aim of the study is to produce the most robust measure of inflation pertaining to high net worth individuals and the luxury goods and services market by conducting in-depth research into what the wealthy actually buy on an annual basis.

Coutts began by examining the premium products and services purchased by the wealthy based upon expenditure of World Card holders. They price matched these goods over 12 months to ascertain changes in prices over the period. Over £600 million of expenditure was then matched by Coutts to the traditional CPI categories (such as food and drink, or clothing and footwear). These categories were then reweighted to reflect the average value of expenditure by HNWIs in each category.

The number of wealthy individuals in the UK has risen significantly over the last few years with around 112,400 people in the UK holding onshore liquid assets in excess of £1m, a figure predicted to rise by almost 13% by 2011.** On average, income rises quicker for HNWIs (3.1%) than that of average UK incomes (2.3%).*** HNWIs spend a significant proportion of their income on ‘luxury’ goods which come at a premium, with supply of such products and services of this type being limited. Typically these costs are rising faster than prices of more freely available products and services.

Perry Littleboy, Head of Marketing and Business Development at Coutts & Co comments: “The initial findings from the Coutts Wealth Inflation Index clearly demonstrate that High Net Worth Individuals are experiencing a higher rate of personal inflation than that of the general UK population. With annual expenditure rising at such high rates among wealthy households, they should be aware of the impact this can have.

“We have been able to create this index thanks to our extensive history of working with high net worth individuals. This real understanding of client spending and how inflation can impact them helps us to provide advice to our clients that is relevant.

Price variations in the last 12 months

The Index shows some interesting differences in price increases over the past year – examples include:
·Jewellery (25%)
·Club memberships (17%)
·School fees (7%)
·Luxury cars (3%)
·Restaurants (0.5%)

What do high net worth individuals buy?****

By analysing the spending habits of its Coutts World Card holders, Coutts & Co has been able to outline the average annual outlay per person within each category. High net worth individuals typically spend most of their money, after private education***** for those with children, on the recreation category (220% more than the average spend), followed by restaurants (308% more) and Household goods and services (410% more). Spend on food and drink in absolute terms is 25% more than the average person but represents a far smaller proportion of their overall spending.

Categories Equivalent average annual spend per person High net worth annual spend per person
Transport £3,224 £6,389
Recreation and Miscellaneous £3,843 £12,305
Housing, fuel and power £2,475 £1,419
Food and drink combined £3,016 £3,786
Restaurants £1,971 £8,045
Household goods and services £1,576 £8,047
Clothing and footwear £1,206 £4,259
Communications £608 £236
Education***** £374 £1,893
Health £306 £1,420

Source: Family Expenditure Survey and Coutts

Individual clients = individual inflation rates

Every individual will have their own unique inflation rate, depending on the goods and services that they purchase. As not all spending will be on 'luxury' goods, the CWII can be used in combination with the CPI basket. For example a 50/50 split of spend (i.e. people spending only 50% of their disposable income on high-end products) will still result in a 5.8% rate of inflation – more than double the CPI.

Impact of proportional spend on overall inflation rate:

CPI Basket of goods CWII
100 : 0 75 : 25 50 : 50 25 : 75 0 : 100
2.1% 3.42% 5.8% 7.65 9.5%

Stuart Porteous, Head of RBS Group Economics, which constructed the index comments: "We often hear about large rises in wealthy households’ incomes, but less is known about the expenditure side of the equation. The prices of luxury goods and services are rising at such a rapid rate that nominal increases in income may overstate the increase in their real purchasing power."

Perry Littleboy concludes, "With an ongoing rise in the number of wealthy individuals across the globe, coupled with limited supplies and increased costs of their preferred products and services, this upward inflation trend looks all set to continue. The Coutts Wealth Inflation Index, with its indepth research into this market will continue providing unique insight into the inflationary pressures faced by today’s wealthy."

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