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It’s probably not surprising to learn that prices have risen across the US economy, whether at the grocery store or at the gas pump.
But how much have your personal household expenses increased, and how does that compare to that of the average American?
Calculating your personal inflation rate can help answer these questions.
The consumer price index is a common measure of inflation. Households paid 8.6% more money in May 2022 for a large basket of goods and services compared to that same basket in May 2021 – the biggest annual jump in more than 40 years.
Learn more about personal finance:
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However, your basket is probably different. For one thing, purchases and spending habits vary from household to household, depending on factors such as income, age and geography, according to Brian Bethune, an economist and professor at Boston College.
This means that your personal inflation rate is also likely diverging from the US average.
There are several ways to calculate your inflation rate. The pitfalls of such a calculation emerged on Monday when Nikki Haley, former US ambassador to the United Nations during the Trump administration, tweeted an incorrect estimate for a July 4 barbecue.
(His Tweeter, which has since been removed, estimated that a barbecue was 67.2% more expensive compared to last year. By comparison, the American Farm Bureau Federation said costs rose 17% — a much smaller increase, though still high. President Joe Biden cited this agricultural trade group in 2021 when the White House said the costs of an Independence Day barbecue were down 16 cents from 2020.)
Calculating your personal inflation rate
Here’s the easiest way to get a rough estimate of your personal annual inflation rate, according to economists.
- The first step is to determine how much of your spending falls into certain categories or categories, such as food, energy, clothing, housing, and entertainment.
To do this, you will need to consult your bank and credit card statements for the past year to find out the exact amount of expenses. The US Bureau of Labor Statistics publishes a detailed list that can help you detail your purchases by category.
- Calculate your category “weights”. This weighting essentially corresponds to the share of your expenses devoted to specific compartments. (The Consumer Price Index calls this weighting “materiality”.)
To do this, count your total expenses in the categories. Divide each figure by your overall annual spend to calculate the category weight.
For example, let’s say my total household expenses from May 2021 to May 2022 were $50,000. I spent $17,000 (or 34% of the total) on rent and $6,000 (or 12%) on groceries. Their category weights would be 0.34 and 0.12, respectively.
- Refer again to the BLS table of detailed expense categories. The “Unadjusted Percentage Change” column shows the average annual percentage increase in price for each item.
For example, rent payments rose 5.5% in the year to May. The price of food at home (groceries) increased by 11.9% during the same period.
- Multiply the category weights in Step 2 by the annual percentage change for those categories in Step 3. Using the example above, you would multiply 0.34 x 5.5 for the rent calculation. Multiply 0.12 x 11.9 for food. And so on for all other categories of expenses.
- To determine your personal inflation rate, add the category totals from step 4. (In the example above: 1.87 + 1.428 + etc.) This total is your annual inflation rate expressed as a percentage .
- Compare your rate to the national average. For annual spending through May, a percentage below 8.6% means your costs haven’t increased as much as the average American.
A higher number means your costs have increased more over the past year. Of course, households usually think in dollars and cents, not percentages.
A more accurate way to calculate your rate
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The calculation above compares your household’s experience to that of the average American, based on differences in goods and services, as well as the quantity purchased by each household. However, the formula takes advantage of the average prices of these goods and services, which means that it is not a hyper-individualized calculation.
Consumers can perform additional calculations to better understand how their individual household spending has changed year over year:
- Account for all expenses on your bank and credit card statements for the last 12 months, as well as for the previous 12 month period.
- Subtract the totals and divide by the first year’s expenses. For example, let’s say my expenses were $50,000 from May 2021 to May 2022, and $45,000 from May 2020 to May 2021. Divide the difference ($5,000) by $45,000.
- Multiply this number from Step 2 by 100 to determine your personal annual inflation rate.
In the example above, I would multiply 0.111 by 100. My personal annual inflation rate during this period would have been 11.1%.
There are a few caveats. On the one hand, you are probably not able to account for expenses made in cash. It’s also likely that you’ve looked for cheaper alternatives where possible (substituting cheaper foods, for example), or maybe you’re driving less to save gas.
All of this means that your calculation may not be 100% accurate, but it will be approximate.
Moreover, costs do not increase in a vacuum. If you work, your income probably increased too. Average salaries have risen 6.1% over the past year, according to the Federal Reserve Bank of Atlanta. They haven’t kept up with the average inflation rate, but rising household income is eroding some of the financial pain.
“If you have to shell out more money just to get the same items and your income doesn’t keep up with that, then your quality of life deteriorates,” Alex Arnon, associate director of policy analysis for the Penn Wharton Budget Model , said of the impact of inflation.