WRITTEN BY: OPHER GANEL
According to the U.S. 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. 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 U.S., but even at 10% a 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 six 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.