Understanding Your Personal Inflation Rate

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 inflation rate.

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 inflation rate 

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 provider Emerald 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 reduced.”