In the age of personalized medicine, tailored education, and customized diets, isn’t it time we started considering a personalized approach to inflation? Inflation, as any economist will tell you, is the general rise in prices and the concurrent decrease in purchasing power over a period of time. Most countries have an official inflation rate that’s primarily based on the Consumer Price Index (CPI).1 But what if the generalized CPI doesn’t quite match with your personal spending habits and typical monthly expenses?
Why Would I Want My Own Rate?
For most people, the headline inflation number is a good starting point. It gives a general sense of how prices are changing for a broad basket of goods and services. But, not everyone spends money in the same way or on the same things. A retiree might spend more on healthcare, while a young family might focus on education and childcare. Also, someone who is focusing on building on their wealth leading up to retirement, for example, might have several other inflation-related factors to consider.
These life stages can have widely differing inflation rates. Therefore, relying solely on the CPI can lead to miscalculations in one’s financial planning. Considering the powerful effects that compounding can have, even the slightest miscalculations can have significant ripple effects over the years.
Doing the Math
To determine a personalized inflation rate, start by analyzing your personal spending habits. Here are a few steps to include:
1. Track Your Spending: Before understanding your inflation rate, you need a clear view of where your money goes. Categorize your expenses, like housing, food, transport, education, health, entertainment, etc. If real estate is involved—especially if this includes more than one home—don’t forget that many service companies such as lawn care, pool maintenance, and others have likely increased their rates recently. These rates will not be going back down!
2. Compare to the CPI: Once you have a clear understanding of your personal expenses, check how each category is weighted in the official CPI. As of October 12, 2023, for instance, the current percentage makeup of a few major categories of the CPI2 is shown here:
• Food and beverages: 13.380%
• Energy: 7.162
• Housing: 34.749%
• Apparel: 2.525%
• Transportation: 16.053%
• Medical Care: 6.331%
If you want to see even more specifics, you can go to the U.S. Bureau of Labor Statistics Economic News Release or subcategories such as Gasoline, Physicians’ Services, and if you’re planning to travel a lot, Airline Fares.
3. Calculate Weighted Inflation: If you find that your spending doesn’t align with the CPI weights, recalculate inflation using your personal weights for each category. If education makes up a larger portion of your budget, and it’s experiencing a higher inflation rate, then your personal inflation might be higher than the official rate.
4. Adjust Regularly: Your spending patterns and priorities will change over time. Maybe you’ll buy a house (or another one), start funding children’s or even grandchildren’s educations, or retire. These changes will influence your personalized inflation rate.
The Upsides
Yes, getting to a personalized inflation rate involves some effort, but if you want to get a more accurate picture of how inflation will affect your financial future, here are some positives to consider:
• More Accurate Financial Planning: Knowing your personalized inflation rate can make your financial projections more accurate. If your personal inflation is higher than the general rate, you might need to save more for future expenses or retirement.
• Targeted Investment: If certain categories in your budget are experiencing higher inflation, you might consider investing in assets that hedge against that specific inflation. For example, if healthcare costs are rising, investing in healthcare stocks might be something to consider. (While we’re on the healthcare subject, make sure you’re well informed about Medicare as you approach age 65 and Medicare Open Enrollment planning once you’re already enrolled.)
• Personal Empowerment: Being aware of your own inflation rate empowers you to make informed decisions and adjustments to your lifestyle, spending, and investment strategies.
The Takeaway
It’s important to note that while you can estimate your personalized inflation rate, it’s beneficial to engage a financial advisor in this process. They can provide valuable insights, tools, and resources to ensure that your calculations are accurate and that your investment decisions are sound.
A personalized inflation rate provides a more granular view of how rising costs are impacting your specific lifestyle and needs. By tailoring this rate to your individual circumstances, you can make more informed decisions about your financial future. It’s just another smart thing to do to help the cause of ensuring that your savings, investments, and financial plans are on track to meet your unique goals and requirements.
Sources:
1 https://www.bls.gov/cpi/latest-numbers.htm
2 https://www.bls.gov/news.release/cpi.t01.htm
Determining A Personalized Inflation Rate, Copyright © 2023 FMeX. All rights reserved. Distributed by Financial Media Exchange.
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