What this article covers
Opher Ganel shows how to calculate your personal inflation rate by weighting the Bureau of Labor Statistics’ category-level CPI changes by your own spending. Using May 2021 data, when the official CPI was up 5.0%, his example family of non-smokers with a fixed-rate mortgage and no car purchase planned saw inflation of just 2.2%, while a used-car buyer or someone who drives all day could face far more.
Key Takeaways
Your personal inflation rate is a spending-weighted average of CPI category changes
Multiply each BLS category’s 12-month price change by the share of your budget you spend in that category, then add up the results. Opher adds a “fixed” category for costs that don’t rise at all, such as fixed-rate mortgage payments and level-term life insurance premiums.
Your personal inflation rate can be well below the official CPI
In Opher’s May 2021 example, the CPI was up 5.0%, yet a family of non-smokers with a fixed-rate mortgage who weren’t buying a car had a personal rate of 2.2%, less than half the official number. Food at home rose just 0.7% that year, and medical care commodities such as prescription medicine fell 1.9%.
Drivers, car buyers and renters can face inflation far above the CPI
The CPI reflects the spending of the “average American family,” not yours. With energy commodities such as gasoline up 54.5% and used vehicles up 29.7% over the same 12 months, someone who drives from town to town or needs a used car, or a renter facing a rent hike, can run a much higher personal rate.
How High Was Inflation in 2021, and How Badly Could It Hurt Your Wallet?
There’s no two ways about it. Prices are moving up. For some things, by over 50% in the past year!
According to the US Bureau of Labor Statistics (BLS), the official score-keeper, May’s year-over-year change in the consumer price index (CPI) was 5.0%.
This is part of a rising trend of year-over-year numbers, from 1.4% in January, to 1.7% in February, to 2.6% in March, to 4.2% in April, to 5.0% in May.
Will June continue this trend? Will July? Will the rest of 2021?
How Does 5% Inflation Compare With Past Decades?
A handy website shows the history of monthly US inflation numbers from 1914 to 2021.
According to the US Inflation Calculator website, last time we saw a monthly year-over-year reading of 5% was in 2008. Last time we had a calendar year with 5% inflation was 1990.
If 2021 ends with double-digit inflation, it’ll be higher than any calendar year in the last 40 years, all the way back to 1981!
Inflation can be (and has been in the past) really bad news for consumers. Looking at 10-year historic inflation numbers, if in 1982 you tried buying something that cost $100 in 1972, you’d need $231!
When I was 23 years old in Israel, I remember experiencing 33% inflation in a single month (specifically, June 1985)! Thankfully, this is extremely unlikely to happen here in the US, but even at 10%/year inflation can be very unpleasant.
How to Calculate Your Personal Inflation Rate Using CPI Categories
If you simply look at the BLS’s CPI number, it looks alarming. But it may not be quite that bad for you personally.
The BLS website lets you drill down to major categories. These currently show the following:
- Shelter: 2.2%
- Energy commodities: 54.5%
- Energy services: 6.2%
- Food at home: 0.7%
- Food away from home: 4.0%
- New vehicles: 3.3%
- Used vehicles: 29.7%
- Transportation services: 11.2%
- Apparel: 4.6%
- Medical care commodities: -1.9%
- Medical care services: 1.5%
- Alcoholic beverages: 1.6%
- Tobacco and smoking products: 7.3%
As you can see, energy commodities (think gas for your car, electricity, natural gas, fuel oil) increased an incredible 54.5% over the past 12 months.
On the other hand, medical care commodities (think prescription medicine) dropped by 1.9%.
Food away from home ran up 4%, nearly 6 times faster than food at home’s 0.7%.
With this breakdown, you can calculate your own personal rate of inflation. The following table shows an example for a family of non-smokers who bought their home with a fixed-rate mortgage, and who aren’t buying new or used cars.
The “CPI” column shows the current reading of the CPI according to the BLS website for each category (adding a “fixed” category for things that don’t go up, such as fixed-rate mortgage payments, level-term life insurance premiums, etc.).
In the next column, you can see a hypothetical family’s budget broken down by those categories.
In the final column, you multiply the CPI increase by your spending fractions to get the contribution of each category to your personal inflation rate.
Then, simply sum the numbers in that last column to find your overall personal inflation rate. For this specific family, inflation is running at 2.2%, less than half the official CPI.
Why Your Personal Inflation Rate Can Be Higher or Lower Than the CPI
Of course not.
The overall CPI is based on a pre-defined basket of goods and services, weighted by how the budget of the “average American family” breaks down.
Your own rate may be lower, like the above example, or it might be higher.
Imagine if you need to buy a used car tomorrow, or if you’re a traveling salesman driving from town to town every day. If that’s you, your inflation rate will skew much higher due to the 29.7% rate for used vehicles or by 54.5% for gas. Or you might be renting and expecting your landlord to hike your rent as soon as he can, so your “fixed” category is much smaller.
The Bottom Line: Compare Your Personal Inflation Rate With Your Raises
Inflation in general isn’t good for consumers, and is especially bad for people living on fixed income.
However, it can be very good for borrowers with fixed-interest loans (like most mortgages). If cost-of-living adjustments (COLAs) push your income up while your mortgage payments stay the same, those mortgage payments become easier over time.
The above shows you how to figure out and calculate your personal inflation rate. Then, compare that to any COLAs (or other raises) you may get. If the latter is higher than the former, you’re in luck. If the opposite is true, you’ll need to find ways to make more money, trim your spending, or both.
Frequently Asked Questions
How do you calculate your personal inflation rate?
Break your budget into the major categories the Bureau of Labor Statistics reports for the CPI, such as shelter, energy, food at home, food away from home and vehicles. Multiply each category’s 12-month price change by the fraction of your spending that goes to it, then add the results. Costs that don’t change, like fixed-rate mortgage payments, go in a “fixed” category with zero inflation.
Why is my personal inflation rate different from the CPI?
The CPI is based on a pre-defined basket of goods and services, weighted by how the budget of the average American family breaks down. If more of your spending goes to categories rising slowly, or to fixed payments, your rate will be lower. If you spend heavily on fast-rising categories, such as gas or a used car, it will be higher.
Who does inflation hurt most, and can it help anyone?
Inflation is generally bad for consumers and especially bad for people living on fixed income. It can help borrowers with fixed-interest loans, such as most mortgages: if cost-of-living adjustments push your income up while your payments stay the same, those payments become easier to afford over time.
What should you do after you calculate your personal inflation rate?
Compare it with any cost-of-living adjustment or other raise you expect. If your raise is higher than your personal inflation rate, you’re coming out ahead. If it’s lower, you’ll need to find ways to make more money, trim your spending, or both.
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Disclaimer: This article is intended for informational purposes only, and should not be considered financial advice. You should consult a financial professional before making any major financial decisions.
About the author
Contributing Writer, Wealthtender
My career has taken some unexpected turns, from earning a PhD in experimental high-energy physics, to conducting cosmic-ray research in Antarctica, to supporting NASA projects and programs, to running my own consulting business. I also run several other small businesses and help my wife run her Marriage and Family Therapy practice.
Those experiences taught me to question assumptions, think critically, and recognize that real-world decisions of any significance rarely have simple answers that apply to everyone. Today, I bring that perspective to writing about personal finance. Drawing on my analytical background, business experience, and research, I explore financial decisions, challenge conventional wisdom, and help readers understand the tradeoffs that can affect their financial well-being. To complement my own research and experience, I also weave insights from financial professionals into my articles, drawing on their expertise and real-world experience helping clients navigate financial decisions and challenges.
At medium.com/@opher-ganel, you can read more of my articles and subscribe to receive email notifications when new ones come out.