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But how much has your personal household spending increased, and how does that compare to the average American?
Calculating your personal inflation rate can help answer these questions.
The consumer price index is a general measure of inflation. In May 2022, households paid 8.6% more for a wide basket of goods and services than in May 2021. the biggest annual jump in more than 40 years.
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However, your shopping cart is likely different. According to Brian Bethune, an economist and professor at Boston College, purchasing and consumption habits vary from family to family based on factors such as income, age and geography.
This means that your personal inflation rate is likely different from the US average as well.
There are several ways to calculate the inflation rate. The pitfalls of that calculation came into focus Monday when Nikki Haley, the former U.S. ambassador to the United Nations during the Trump administration, tweeted an incorrect assessment of the July 4 cookout.
(Her tweet, which has since been removed, priced barbecue 67.2% higher than last year. By comparison, the American Farm Bureau Federation said the costs were increased by 17% – a much smaller rise, although high. President Joe Biden is quoted that agricultural trade group in 2021, when the White House said spending on Independence Day barbecue was down 16 cents from 2020.)
According to economists, here’s the easiest way to get a rough estimate of your personal annual inflation rate.
- The first step is to determine how much of your spending falls into specific categories or buckets, such as food, energy, clothing, housing, and entertainment.
To do this, you need to consult your bank and credit card statements for the past year to find the exact amount of your expenses. The US Bureau of Labor Statistics publishes a detailed list which can help you break down your shopping into categories.
- Calculate your weight category. This ratio basically represents the proportion of your spend dedicated to specific buckets. (The Consumer Price Index calls this ratio “relative importance.”)
To do this, calculate the total costs by category. Divide each number by your total annual expenses to calculate the category weight.
For example, let’s say my household’s total 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 weighting factor will be 0.34 and 0.12, respectively.
- Link to BLS table detailed cost categories again. The “unadjusted percentage change” column shows the average annual percentage increase in price for each commodity.
For example, for the year to May, rent payments increased by 5.5%. Food at home (groceries) increased in price by 11.9% during the same period.
- Multiply the category weighting factor 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 to calculate the rent. Multiply 0.12 x 11.9 by the food. And so on for all other categories of expenses.
- To determine your personal inflation rate, add up the category results 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 with the national average. In terms of annual spending this May, a percentage below 8.6% means your spending hasn’t increased as much as the average American.
A higher number means your expenses have increased more over the past year. Of course, households usually calculate in dollars and cents, not percentages.
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The above calculation compares your family’s experience to that of the average American based on differences in goods and services and the amount each family buys. However, the formula uses average prices for those goods and services, which means it’s not a very individualized calculation.
Consumers can do some additional calculations to get a better idea of how their individual household expenses have changed year over year:
- Calculate all expenses from your bank and credit card statements for the last 12 months and the previous 12 months.
- Subtract the results 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 over this period would be 11.1%.
There are a few caveats. For one thing, you probably aren’t able to account for any expenses made in cash. It’s also likely that you’ve looked for less expensive alternatives where possible (substituting less expensive products, for example), or maybe you drive less to save on gas.
All this means is that your calculation may not be 100% accurate, but it will be on the field.
In addition, costs do not rise in a vacuum. If you work, your income probably also grew. According to the Federal Reserve Bank of Atlanta, the average salary increased by 6.1% last year. They haven’t kept up with the average rate of inflation, but the higher household income lessens some of the financial pain.
“If you have to shell out more dollars to get the same things, and your income doesn’t keep up, then your quality of life suffers,” Alex Arnon, associate director of policy analysis at Penn Wharton’s Budget Model, said of the impact of inflation.