Core prices are increasing at an
annual rate of 1.8 percent, according to the latest consumer price index (CPI),
one of the key measures used to track U.S. inflation. Compared to last January,
inflation rose 2.1 percent.
That’s important if you’re a
member of the Federal
Reserve, and it’s nice to know whether prices are rising for the average
Joe. But for individuals trying to make the right financial decisions, the
inflation rate may not mean much.
After all, the CPI doesn’t
address whether every consumer is seeing an increase in prices in their own
households. That’s something that the Bureau of Labor Statistics (BLS) clearly acknowledges.
“If the inflation rate, is let’s
say, 2 percent at the national level, that does not necessarily mean that for
your individual household the expenditures may have changed by 2 percent,” says
Arindam Bandopadhyaya, an interim dean and professor of finance at the University of Massachusetts Boston.
“It may have been more than that or less than that.”
The CPI just looks at price
changes for the average consumer in an urban area. And it only examines the
prices of a select group of goods and services, some of which aren’t
necessarily what individuals are regularly buying and spending money on.
To get a better sense of your
individual experience with inflation, you’ll need to know your personal
Measuring inflation beyond CPI
If you do a quick Google search,
you’ll find multiple organizations trying to help individual consumers make
better use of the data provided by the CPI. One example is the Federal Reserve
Bank of Atlanta’s myCPI tool.
The tool asks users a series of
questions and uses information—including gender, education level, age and
income level—to provide consumers with a better idea of how prices are changing
for people with similar lifestyles and spending habits. It combines data from
the BLS and the Consumer Expenditures Survey.
Another helpful measure of
inflation is the Everyday Price Index (EPI), which the American
Institute for Economic Research started providing in 2012. The EPI includes
many of the components in the CPI, but excludes fixed expenses that stem from
contractual agreements, like rent and goods and services that aren’t purchased
on a frequent basis, such as cars. It’s purpose: Track the changing prices of
necessities that consumers routinely purchase.
“We wanted to create this
measurement of what people see and feel every day,” says Robert Hughes, senior
research fellow at the American Institute for Economic Research.
Calculating your personal
Fluctuating prices of items such
as food and personal care products make budgeting difficult. It’s much easier
when you can use a tool like the EPI to look at price levels for the products
you often find yourself buying.
If you wanted an even closer look
at your household’s spending patterns, there are tools available to help. One
example is a calculator developed by financial solutions
Connect. Enter your expenses, including medical care costs and housing
costs, and you’ll see how your personal inflation rate compares to CPI data
released annually in May.
Faculty at the College of
Management at the University of Massachusetts Boston have developed a series of
calculators, including one that can measure your personal inflation rate.
Households can see their individual and weighted inflation rate, which reveals
how their personal expenditures have changed over time in relation to changes
in their income levels.
Making sense of the data
You might be surprised by how
your own inflation rate compares to the national average. At the very least,
you’ll get a better sense of how well you’re keeping up with your budget.
Once you know how much you spend
on certain items, it becomes much easier to save money. You’ll have a much
better idea of whether you can make adjustments and put more money in a savings account or certificate of deposit.
Then you can recreate your budget
based on your financial goals and priorities, says Danny Michael, founder
of Satori Wealth
Management, a fee-only financial planning firm in Los Angeles.
“Once it’s categorized, then you
know which expenses you can’t eliminate and you need to live,” Michael says.
“But then these are other expenses that could be eliminated or could be
here for the original article from Bankrate.com.