What is your real inflation rate?

If you’ve only paid passing attention to inflation – and it’s been hard to ignore – you know that recent inflation readings have been ugly.

What you may not have thought of, however, is that the statistical calculation of average inflation, the Consumer Price Index (CPI), is a crude instrument as it aims to reflect the consumer experiences as a whole. In the US, for example, to calculate the CPI, the US Bureau of Labor Statistics uses a consumption basket of goods and services, with each item weighted by the share of the typical household budget it represents. . Categories like housing receive the highest weighting, while leisure and clothing get lower weightings.

But what your household spends money on almost certainly differs from that of a typical household. Take, for example, a new homeowner who has a large mortgage and is also making substantial improvements to their home while simultaneously purchasing furniture, window treatments, and garden tools. Housing expenses are likely to make up a larger share of the new owner’s budget than is likely the case for the population as a whole. Meanwhile, a retired senior who is mortgage-free will likely have lower housing expenses, as a percentage of household expenses, than the general population, but they may have travel or higher health.

Calculate yours

Given these variations, it may be useful to use the CPI weights as starting point to understand the impact of inflation on your household and how aggressively you need to defend against it. But you can approximate a personal inflation rate by looking at your actual spending in each of the major categories and mixing it with the inflation we see in those areas.

On this spreadsheet, you can enter your expenses in each of the major categories, then calculate a custom inflation rate that incorporates inflation by expense category. We’ve filled it in with some sample data, but you can go back to your actual spending over the past year; you can also modify the inflation expectations for each line item to align with your own experiences.

One factor that will likely stand out when calculating a custom inflation rate is the importance of transportation costs in recent increases in inflation. If you’ve had to buy a car in the past year or even fill the tank frequently, you’ve probably seen a substantial increase in your commuting expenses. City dwellers who cycle or walk, on the other hand, have been much less affected by the rise in transport prices.

Food prices have seen the second highest rate of inflation over the past year, and they are less likely to vary between different consumers. (Everyone has to eat!) Even so, there are some interesting variations in inflation rates between subcategories, and they can affect whether your personal food inflation rate is higher or lower than the food inflation rate. basic.

As interesting as it may be to offer a personalized estimate of inflation, it is important not to come away with a false impression of accuracy about inflation. For one thing, inflation statistics are fleeting: the one-year figures provided in the spreadsheet reflect price swings in various categories amid a booming economy and supply chain disruptions. .

In addition, the number to really pay attention to is the trend of your real, overall expenses, which depends on a few key variables: your fixed and discretionary expenses as well as the evolution of inflation in each of the expense categories. In the end, the actual trend of your household spending matters more than looking at inflation on a small scale, because you have a level of control over some of your spending, while inflation is out of your control. .

Inflation for the elderly

Life stage also tends to play a role in the inflation experience. The difference in inflation rates is due to differences in the consumption baskets of the elderly and the general population. Older people spend more on medical care than the general population. And while the medical care inflation rate in the United States, for example, has recently been even lower than the general inflation rate, its historical average is above 5%, which has had a disproportionate effect on people elderly.

On the other side of the ledger, older adults’ spending on other budget items is lower, including transportation and education. Older adults move less than younger ones, and their years of high education spending are also usually behind them. Spending on food, whether restaurant meals or food prepared at home, also consumes a smaller share of the budget of older adults than that of younger adults. Thus, the rise in food prices – the category with the second highest inflation over the past 12 months to February 2022 – has probably affected the elderly somewhat less than the general population.

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