Hans Price, divisional director of financial planning firm Brewin Dolphin, Oxford, explains how inflation is impacting on our spending power

Many people may not know the difference between the Consumer Price Index (CPI) and the Retail Price Index (RPI) but they will only have to buy a fish and chip supper to know that life is getting more expensive.

The price of fish is up 12.2 per cent over the past 12 months, while potatoes are up by 5.4 per cent .

The rising cost of food is one of the main reasons why the latest official figures show the CPI running at 4.2 per cent — and many economists still expect inflation to reach five per cent once the predicted gas and electricity price hikes take effect later in the year.

Inflation causes havoc for finances and it is of no surprise that research shows that as many as nine out of ten people are worried about the effects it can have on their money.

In the past, pay rises have helped people offset inflation, yet we are in an age of austerity and many employers, from both the private and public sectors, have imposed pay freezes in a bid to cut costs.

For many workers, a pay freeze is akin to a pay cut as the purchasing power of their income loses ground against everyday expenses such as filling up the car with petrol.

It’s not just workers who are feeling the pinch. Pensioners whose pensions are not index-linked are being squeezed too as their fixed income loses ground against rising prices.

Even people with spare cash are losing out because their savings cannot keep pace with inflation. Basic–rate taxpayers need to earn interest of 5.25 per cent on their savings in order to make a real return once CPI inflation is taken into account.

Higher rate taxpayers are in an even worse position, needing returns of seven per cent to stop the value of their deposits being shrunk by inflation. But with interest rates at rock-bottom, accounts paying such high rates are few and far between.

Yet not everyone is a loser when inflation takes off. Borrowers, for one, can be the winners. People with debts can benefit from inflation because, provided their income keeps pace with prices, the debt erodes.

In other words, the pound you use to pay off the loan is worth less than the pound you borrowed.

For example, a homebuyer might borrow £100,000 as an interest-only mortgage for 20 years. At the end of the term, they will still have to repay £100,000, but it will only be worth £66,760 in real terms today if inflation grew at two per cent a year.

With inflation at five per cent a year, the real value of the debt would have dropped even further, to £35,850 in real terms.

Investors in the stock market can also counter inflation.

History shows that returns on equities can beat inflation when dividends are brought into the equation.

The power of the dividend, when reinvested, is worth remembering, as dividend income makes up a fair proportion of total returns.

According to Barclays’ 2011 Equity Gilt Study, £100 invested in equities at the end of 1899 would be worth just £180 in real terms today without the reinvestment of dividend income. With reinvestment, the same portfolio would have grown to £24,133.

And when you drill down to specific stock market sectors, commodity investors won’t be bemoaning high food inflation or the rising price of gold (which is the classic inflation hedge).

Many funds and portfolios, which have invested in commodity-related shares, have delivered stellar returns in recent years.

Meanwhile, the price of gold has climbed by 185pc from a little over $600/oz (£367) to more than $1,700/oz (£1,040) since July 2006.

Inflation has been ahead of the Bank of England’s target of two per cent for more than two and a half years and is likely to influence your finances for some time to come.

In short, savers, investors and pensioners are going to need to have their wits about them if they are going to counter the detrimental impact of rising prices.