What is Your Personal Rate of Inflation?

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Inflation is often seen as the termite of the financial world. Gnawing away at your assets over long periods of time, it’s an insidious threat.

growing piles of coins

Hard to detect over short time frames, inflation can seriously damage your assets over the long term. It robs your portfolio of much of its growth, and cripples your purchasing power. Or does it? 

Recently I worked on a project that had me combing through Quicken transactions from more than 20 years ago to identify key events in family history. I’ve recorded virtually every dollar we’ve spent back to 1990. I couldn’t help but notice the prices we were paying back then. It wasn’t exactly what you’d expect from listening to the mainstream media regarding inflation.…

Our Past Spending

The first thing I noticed was some nice meals out. Cost $30-$40. Nowadays those same meals might be $40-$50. 

Next, I noted that we were paying $20 to fill up our cars back then — the cost has fluctuated up and down around that number since. An oil change was about $30. Still is. 

I paid $180 for a CD boom box, about three times what one costs today. New music CD’s were costing $15 a piece, similar to what they cost now. Most people now listen to music on their devices, often streamed for free.

I bought a pair of pants and a new suit. The prices looked about the same as what I’d expect to pay today.

So what gives? On the face of it, the cost of living 31 years ago, which I have meticulously recorded in Quicken, doesn’t look all that different than it does today. One area was a bit more expensive, a number of areas look about the same, and some areas — notably electronics — are actually significantly cheaper now.

Calculating Inflation

But, according to the Bureau of Labor Statistics Inflation Calculator, $1 in 1990 should be worth about $2.10 today. The average annual inflation over that time frame was a little more than 2%. Yet, for a random sampling of my purchases, that just isn’t so. What gives?

For much of the last decade, a chorus of voices have pointed out the dangers of inflation. They’ve warned that the Fed’s current policy makes it all but inevitable. I loathe the idea of politicians undermining our money supply as much as anyone. But are we actually seeing that? My personal expense data doesn’t exactly show it.

Related: How Does Massive Government Spending Impact Retirement Planning?

We all know inflation is real, for some assets, from the stories we hear about what cars or houses cost our parents or grandparents decades ago. But how does inflation apply to other items? And, more importantly, how does it apply to your lifestyle, in recent times? Could you have a personal inflation rate that is quite different from the government’s figures?

Official Measures of Inflation

First some definitions. Inflation is the percentage rate at which prices for goods and services in an economy increase. If the inflation rate is 3%, then something that costs $100 now, will cost $103 next year, $106.09 the following year, and $109.27 the year after that. Just like a savings account in reverse, the effects of inflation compound over time — not a good thing.

Consumer Price Index

The government uses several different measures for inflation, which may or may not relate well to your personal experience. The most familiar measure is the Bureau of Labor Statistics (BLS) Consumer Price Index (CPI or CPI-U). CPI is a measure of the average change in prices paid by an urban consumer for a certain “basket” of goods and services. The CPI market basket is drawn from eight areas: food, housing, apparel, transportation, medical care, recreation, education, and other. Because the CPI is weighted by the amount of income a typical consumer spends in each area, it also constitutes a cost of living index. The CPI is used extensively to adjust for many factors throughout the economy including government benefits, and tax brackets.

Core CPI

Another familiar measure is Core CPI which takes out volatile food and energy prices. Certain government entities, such as the Federal Reserve, need to use an inflation index that’s less volatile and more a measure of systemic, or long-term changes in the economy. In certain, limited scenarios — such as a short-term supply disruption, the Core CPI might be helpful in filtering out economic noise. But, for most of us, most of the time, a measure of the cost of living without food and energy costs is pretty useless!

Other Measures of Inflation

There are other, non-governmental measures of inflation, some of which purport to be measuring a higher actual rate of inflation. One of the more authoritative, the Billion Prices Project at MIT, based on pricing data collected from hundreds of retailers on a daily basis. It shows a divergence from CPI of as much as about 1.5% over various time spans, but general agreement in direction.

A final measure of inflation from the BLS is of particular interest to us here: the Chained Consumer Price Index (C-CPI-U). This index, which was published beginning in 2002, uses a formula to take into account consumers’ changing behavior in the face of rising prices. On average, when the price of some food item goes through the roof, we don’t continue spending blindly on it. Instead, we substitute.

Perhaps because it is newer, or because it is less beneficial to most constituents, the C-CPI-U is not yet widely used in government programs. The difference in CPI-U and C-CPI-U has only averaged about 0.3 to 0.4 percent in some recent years, indicating that average consumers have limited room to adjust their lifestyle in the face of price increases. Not surprisingly, the Chained CPI may feature prominently in negotiations to restore fiscal stability to key government programs, because it provides statistical cover for politicians to reduce government benefits.

Your Inflation Rate May Differ

Government measures of inflation are likely to impact your income from various government programs. But when it comes to your personal budget — spending to live comfortably in retirement — it helps to have some sense of your “personal” rate of inflation. As in my experience, this could be quite different from the government’s numbers.

Just one reason that your personal rate of inflation could be different from the CPI is that the government weights prices according to the priorities of the “average” consumer. If your consumption patterns are different, your weights will be different. For example the CPI weights housing costs at about 40% of living expenses. If you own your home, or rent a modest place, you may not spend that much on housing.

Related: How Much House Can You Really Afford?

Another reason your experience may vary is geographical. Different regions of the country will experience different rates of inflation, especially for housing, food, and fuel.

Yet another reason for variation is your level of thriftiness, and the timing of your purchases. If you are frugal, hunt for bargains, and buy used, on sale, and out of season — you may not experience the same inflation rate as the average consumer.

Our Personal Inflation Rate… And Yours

Our personal grocery food costs, which I haven’t mentioned yet, are an example where personal inflation rates may defy official figures. Surely ours have gone up in 22 years? It’s hard for me to normalize our data because it starts just when our son was born. I can definitively say that our grocery expenses have gone down by hundreds of dollars a month recently. Why? Well, the first big leg down was when we became empty nesters. But we accomplished another big leg down more recently, just the two of us, by re-focusing on careful shopping and pantry management, and economical, mostly meat-free meals. So we’ve engineered our own personal “deflation.”

Thus there are a variety of causes and scenarios for variations between your personal rate of inflation and the average.

Why Personal Inflation Rates Differ

Obviously, for us, inflation hasn’t been as severe a problem in at least some categories of spending as the government and pundits would have you believe. Why?

I suspect two main factors:

  1. Those of us accustomed to living frugally are very sensitive to higher prices. We’re practiced at modifying our lifestyles to deal with them. Rather than paying twice as much for food, we’ll simply adjust our diet. If gas prices increase, we’ll live closer to work and drive more fuel efficient vehicles. Instead of supersizing, we’ll downsize. So the official Chained CPI for the average consumer really understates the ability some of us have to adapt.
  2. Technology and productivity growth have kept a lid on inflation, even reversed it, in certain areas, notably electronics. But the impact on other goods and services of computer-driven efficiencies has probably been widespread too. And it is likely that technological progress will continue, though we should probably not bank on the same rate we’ve enjoyed in the past. So, to the extent you can keep your consumption constant, instead of increasing it along with technology, your cost of living could moderate over time. (For example, technology has driven the cost of video displays relentlessly down, but the average consumer response has been to buy more and bigger displays. The same phenomenon is visible in housing, transportation, and other areas.)

In the end, watching and optimizing your lifestyle will pay greater dividends than the general wisdom about inflation allows. Clearly prices increase in some areas that we can’t control. (Health care comes to mind.) But in many other areas, inflation can be muted over even several-decade time spans, because technology plus our own behavior give us wide latitude to control it effectively.

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This updated post was initially published June 27, 2012.

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[The founder of CanIRetireYet.com, Darrow Kirkpatrick relied on a modest lifestyle, high savings rate, and simple passive index investing to retire at age 50 from a career as a civil and software engineer. He has been quoted or published in The Wall Street Journal, MarketWatch, Kiplinger, The Huffington Post, Consumer Reports, and Money Magazine among others. His books include Retiring Sooner: How to Accelerate Your Financial Independence and Can I Retire Yet? How to Make the Biggest Financial Decision of the Rest of Your Life.]

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18 Comments

  1. I control my spending a lot. I also have a regular job. I rarely eat out. I belong to an investment club where we meet once a month at a local coffee shop type of restaurant for an early dinner. I typically spend about $15 for dinner, dessert, sales tax, and tip. My beverage is free water with ice. About three times a year, I take my close friends out for dinner for their birthdays. Although I do have my own car, I drive my car only two days (Tuesdays and Thursdays) a week for work. The other three weekdays (Mondays, Wednesdays, and Fridays) for work, I use public transportation which costs me just $5 per day regardless of the number of bus and transit trains I take on Los Angeles' transit system. On Saturdays and Sundays, I typically stay close to home and usually just walk when I need to go somewhere. The money I save and the money I make from my work I use to make additional principal payments (in addition to my regular monthly mortgage payments) on my mortgage loan. At the rate I am going, I should have my mortgage loan paid off in about four years and nine months. My current residence probably will be the last residence that I own. I plan to stay in my current residence for the next few decades (as long as I reasonably healthy).

  2. This is a really great post. Inflation is such a given in all of the investment literature I read that I haven't even stopped to consider the functional implication. Some things simply have not gone up and for those of us on a budget, we very much have the ability to limit it. Plus once you enter the fixed income stage of life, you can further ward off inflation by buying in bulk and owning your own house outright.

    I'm still young, but I have 3 complete years of purchasing data on file. Our monthly budget has not increased one bit.

  3. Thanks Marj. It serves certain financial players to spread fear about inflation. But everybody's personal situation and data warrant a closer look. Thanks for sharing yours….

  4. Where can we find the average personal rates of inflation people are actually using? I am using 1% over the official inflation rate…not sure how that stacks up to others. Certainly it will vary depending on a number of individual factors, but it would be nice to see what others are using.

  5. Hi Louis. I agree it would be very interesting to know the actual inflation experience of specific individuals, in contrast to the official statistics. I'm not aware of any organized source for that information. But there is a thread at the Early Retirement forum where various people offer their experience. Also, Bogleheads is always a good source for first-hand accounts. Beyond that, I may eventually set up some sort of poll here, if there is interest, so we can "crowd-source" everybody's best guess at future investment returns, inflation, etc. Might be interesting, though not likely accurate!

  6. I think my personal inflation rate has increased over the last couple of years. I've graduated from college and thus am paying for more things on my own. But in other ways, I've re prioritized my spending and cut it down to be more manageable. Will be interested to see where it goes in the next 5 years.

  7. Thanks Jenna. Yeah, I think you'll find it's more under your control than some of the popular statistics would indicate. As you say, there are often tradeoffs that can be made.

  8. My financial planning rate is 3%. I consider this to be a conservative number and I doubt my actual rate will ever hit that. One big inflation unknown is healthcare of course. It only takes one significant event with bad insurance to get an inflation rate of 100%!! But continuing with the idea of adjustments… One thing you can do to control that rate is to stay healthy. Eat right, exercise, take care of your brain. I haven’t paid for any actual health care in a very long time.

  9. Your post about managing inflation personally is heartening, and I would like to see what your inflation poll shows. As I look forward several decades, I worry about medical and assisted living costs in this country. These, along with educational costs (thankfully NOT in my future), seem to be inescapably rising, usually beyond general gov’t inflation predictions. Well, we’ll see where costs are when the time comes…

  10. I have been retired 5 years now. When I was setting up my 6th year budget, I took some time to review these past 5 years. I saw my own personal inflation rate. Utilities (including internet and cable tv), HOA dues (own condo), and dining out have gone up for me. I reviewed ways I could adjust to bring down costs (changed cable tv, ate out less) to bring down costs. But other increases I just had to accept as my personal inflation. So, I agree with you that you have to realize you can manage inflation, perhaps better than financial or government projections.

  11. Always great insight, Darrow!
    I have my annual budget back to about 2000 and will have to see how it has changed over time.
    I wonder how much of the news/propaganda is to keep us thinking we need to save and invest more and more. I’m inside of three years to retirement and my only fear is medical cost between my retirement age (61) and my wife’s Medicare eligibility (my age 69). Otherwise, we should be very sufficiently funded.
    Again, thank you for sharing your perspective on this.
    Dave

  12. Thanks for another great and timely post Chris!

    Just to amuse myself I checked CNBC right after reading it and saw three separate pieces fueling inflation fears – which has become the new normal on such sites.

    My personal experience of inflation since ER’ing in 2002 mirrors yours – though you leave me in the dust when it comes to meticulous record-keeping!

    That said, of course inflation is a legitimate concern and since many of your readers are early retirees or aiming for such I wanted to mention that iBonds are one of the best ways to counteract inflation – especially given that nominal Treasuries of all durations offer negative real yields and TIPS even more so.

    The paltry 10K annual purchase limits (per person) and minor hassle of having to open a Treasury Direct account shouldn’t dissuade folks from really checking these instruments out. Financial advisors and Wall Street can’t make a dime by selling or recommending them but with a current yield of 3.54% (inflation-adjusted every six months, tax deferred for up to 30 years and State tax exempt forever) iBonds are kind of the ultimate “deep cash.” I’ve been amazed in reading recent threads about them on the Bogleheads forums to read that several of the legendary posters there have 10% or more of their total portfolio invested in them – but I can see why.

    Good article on them in the WSJ (paywall):

    https://www.wsj.com/articles/i-bonds-the-safe-high-return-trade-hiding-in-plain-sight-11622213324

  13. Darrow, perhaps my/our experiences are unique military retirees living in the high cost San Diego metro area, but our experiences since retiring ~6 years ago are quite different (a much higher than CPI-stated rate of inflation) for hard to shift out of expenses:

    House insurance: nearly doubled in 5 years
    Internet (broadband access): more than doubled in 6 years
    Medical Insurance co-pays for specialty visits: more than tripled over 5 years
    Energy expenses (already 2nd highest in the nation in 2016): increased from $.19 to $.33 per Kwh ($50-$60 average power bills have become $90-$100+ average power bills)
    Water rates: up 17+% in 5 years
    Gas prices: up ~65% (from ~$2.50/gal to now over $4.10/gal)
    Monthly Property Taxes: up over $200/month over 5 years (even w/ Prop 13 protections in CA)
    Contractor rates for home repairs: more than doubled

    We have already largely maximized our lever pulling to decrease spending in most of those categories without major decrements in our quality of life so a chained CPI would indeed cause problems for us and many like us as the current CPI-linked COLAs have no where near kept up with our largely unavoidable spending categories above.

    Without the massive inflation in assets/stocks over this same time period, especially since March of 2020, we would indeed be in a pretty big world of hurt as our planned for retirement budget has surged impressively while our lifestyle, if anything, has decreased in terms of value of purchases. Our current CPI-linked COLAs have nowhere near kept up with our personal rate of inflation, almost exclusively due to price increases we have had little control over and no great options to transition to instead.

  14. Yes, I agree with the assessment of the lower personal inflation rate AFTER a couple or a single parent become empty nesters.
    Right now I’ve got two young teenagers in the house. I can vouch that our personal inflation is NOT going to decline over the next 5 years. Their driving is next, so auto-insurance will be up. I hope we won’t need to buy a third car for them to share in a couple years, but share the current two cars amongst the 4 of us…fingers crossed on that. The college expenses… Our personal inflation will be climbing for the next 10 years and hopefully, then it will plunge.

    The biggest inflationary effects in this country are on childcare, college education, medical, and housing, but salaries have stagnated. We’ll find out what areas today’s inflation will affect.
    Since you moved from East Coast to NM, perhaps location helped you to see deflation vs. inflation? E.g. We used to frequent restaurants (not fancy) before children and the last time I looked, a very similar meal would set us twice as much… Of course, I don’t know about McDonald’s or the like.
    What I like is that junk (chips, Doritos, etc.) has gotten more expensive. Well, maybe price wise it’s the same, but packages have certainly shrunk, so now I have even more incentive not to buy it. I buy a few bags of Doritos only on vacation and that’s it.

  15. This is a refreshingly informed post on the subject, Darrow. I’m witnessing a lot of sturm-und-drang ‘feelings’ on the subject, “I just paid $6 for a dozen eggs!” “how can gas be $4.40/gallon?” so your considered examination of consumer habits of ‘substituting’ and ‘basket of goods’ is appreciated.

    I do know my own rate of inflation, because I update it each year. In 2020, it was 0.4%. This year, it looks like it might hit 3.5%, because of labor and services increases. It might be a lot more if I need repairs that require a lot of materials. You may have seen that lumber for home building has quadruped in one year. As you note in your post, I own my home so my costs for housing aren’t impacted much. The everyday in-your-face inflation that shows up at the gas pump or at the grocery store has an immediate impression, but my food costs are 5% of my outlay.

    Shrinkflation is a sneaky one, too. Paper towels at Costco are the same bulk price, but what used to be 160 sheets/roll is now 140/ sheets/roll (14.3%).

    I will close with this note. For the previous 10 years, I experienced pretty close to deflation. Gas prices in 2018 were less than in 2005. Electronics and appliances also declined in price, while the quality improved. Auto prices stayed the same for years. So this quick uptick is making an impression, but at the same time I have to acknowledge that it hasn’t happened every year.

  16. As others have mentioned, I’ve taken notice of how companies have been shrinking the amount of product you get, and then charging you the same or more. Coffee, paper towels, and even frozen pizzas. Some of the sale prices arent as good as they used to be either. I like to “fight back” and buy less often than I used to or even cut them out all together. The truth is, you dont always need as much of this stuff as you thought so cutting back can be a good thing.

  17. I retired at 58 from the federal government. My pension and SS garner small, inflation-based raises most years. This month marks 12 years since I retired. I live very frugally and am a very wise shopper. No debt whatsoever–own my home and car outright. I rarely eat out and don’t leave home for long periods. I play golf at local inexpensive courses. I have a lot of money in online savings accounts that don’t earn anywhere near the inflation rate, but don’t worry about that. My various retirement accounts have never been touched. At some point, once Congress stops raising the minimum age for RMDs, I’ll have to take distributions. And likely plow them right back into stocks. I’ve done well over the years with investments and don’t buy and sell or create unnecessary taxable gains. Property taxes, satellite TV, Medicare Part B, utilities do go up, often faster than inflation rates, but are manageable for me.

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