Insights Money Management

How to Calculate Your Personal Inflation Rate

By  Opher Ganel

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High Inflation Is Here Now. Are You Wondering How Badly It Will 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?

What Does It Mean?

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 Badly Will Inflation Hurt Your Personal Wallet?

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.

Is Inflation Really That Low for Everyone?

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

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.

Opher Ganel profile pic

About the Author

Opher Ganel

My career has had many unpredictable twists and turns. A MSc in theoretical physics, PhD in experimental high-energy physics, postdoc in particle detector R&D, research position in experimental cosmic-ray physics (including a couple of visits to Antarctica), a brief stint at a small engineering services company supporting NASA, followed by starting my own small consulting practice supporting NASA projects and programs. Along the way, I started other micro businesses and helped my wife start and grow her own Marriage and Family Therapy practice. Now, I use all these experiences to also offer financial strategy services to help independent professionals achieve their personal and business finance goals.

Connect with me on my own site: OpherGanel.com and/or follow my Medium publication: medium.com/financial-strategy/.

Disclaimer: The information in this article is not intended to encourage any lifestyle changes without careful consideration and consultation with a qualified professional. This article is for reference purposes only, is generic in nature, is not intended as individual advice and is not financial or legal advice.

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