According to the Bureau of Labor Statistics, inflation has reached 9.1%, the highest it’s been since December 1981, when it hit 10%. This is the result of skyrocketing prices for gasoline, food and other items over the past few months.
IMPORTANT POINTS
- In June, inflation increased by 9.1% compared to June of last year, the highest increase since 1981.
- A measure of inflation, the Consumer Price Index, gauges how fast prices are rising for a broad basket of goods and services.
- But you don’t purchase the same things that are in the CPI basket, which means your personal inflation rate is different. Here’s how to calculate it.
The U.S. Bureau of Labor Statistics reported Wednesday that inflation jumped to a new 40-year high in June. The prices Americans pay at the gas pump, at the grocery store, and elsewhere have been rising much faster than normal this year.
It may cause you to ask: Have my personal household costs gone up as much as the average American’s, and how does this compare to what people were paying before?
Calculate your personal inflation rate that can help you answer these questions.
The Consumer Price Index is one way to measure inflation. In June 2022, consumers paid 9.1% more money for a broad basket of goods and services than they did in June 2021 – the largest jump since November 1981.
However, your basket is likely different. Professor Brian Bethune, an economist at Boston College, says that purchasing and consumption habits vary from household to household based on factors such as income, age, and geography.
As a result, your personal inflation rate is likely to be different from the U.S. average.
There are a few ways to calculate your inflation rate. The pitfalls of such a calculation were highlighted earlier this month when Nikki Haley, former U.S. ambassador to the United Nations during the Trump administration, tweeted an incorrect estimate for a July Fourth cookout.
Her tweet, which has since been deleted, pegged a barbecue as 67.2% more expensive relative to last year. By comparison, the American Farm Bureau Federation said costs had increased 17% — a much smaller rise, though still elevated. In 2021, President Joe Biden mentioned that agriculture trade group when the White House reported costs for an Independence Day BBQ had decreased by 16 cents from 2020.
calculation of your personal inflation rate
Here’s a simple way to estimate your personal inflation rate, according to economists
1. You should first determine how much of your spending falls into certain categories or buckets, such as food, energy, clothing, housing, and entertainment.
In order to perform this task, you will need to consult your bank and credit card statements for the past year. The U.S. Bureau of Labor Statistics publishes a detailed list that can help you organize your purchases by category.
2. Calculate your weights — in other words, your relative ranking in categories of spending. The CPI defines weights as the share of your spending devoted to specific buckets.
To keep tabs on how much you are spending in each category, tally up all your yearly spending, divide each number by your aggregate spending for the year, and your result will be the weight of the spending for that category.
Suppose I spent $50,000 between June 2021 and June 2022. I spent $17,000 (or 34%) on rent and $6,000 (or 12%) on groceries, not including rent. Their weightings would be 0.34 and 0.12, respectively.
3. Open the BLS expenditure table and look at the unadjusted percent change column. It displays the average annual percent increase in price for each item.
One way this may be seen is that payments for renting property rose 5.7% year-on-year, while food at home (groceries) were 12.2% more expensive.
4. For annual spending through this June, a percentage lower than 9.1% means that your costs haven’t risen as much as they have across the country.
The higher the number, the higher your costs rose in the past year. Generally, households think in terms of dollars and cents, not percentages.
A better way to figure out how much you charge.
This calculation compares your household experience to that of the average American, based on the differences in the goods and services that each household purchases, as well as the quantity. However, the formula relies on price averages for those goods and services – so it’s not hyper-individualized.
In order to get a more precise understanding of how their individual household spending has changed over time, consumers can do the following calculations:
1. Count all expenses from your bank and credit card statements for the past 12 months as well as the previous 12 months
2. Subtract the total spent over the course of the year, and divide by the year covered. For example, if I spent $40,000 between July 2021 and July 2022, and $30,000 between July 2020 and July 2021, then divide $10,000 by $30,000.
3. Multiply the result from step 2 by 100 to get your personal annual inflation rate.
4. In the example above, I’d multiply 0.333 by 100. My personal annual inflation rate over that period would have been 33.3%.
Using cash, shopping sales can skew results
However, there are a few caveats. For one, any cash expenditures will probably be ineligible for tax deduction. You may have also chosen less-expensive alternatives where possible – or maybe you’ve driven less to save on gasoline.
There may be some slight deviation, but overall the calculation will be accurate.
Furthermore, if you are working, your income has probably also increased. The Federal Reserve Bank of Atlanta reports that a 6.1% increase in wages has occurred in the past year. This hasn’t kept pace with inflation, but more household income can ease financial pain.
“If you have to shell out more dollars just to get the same items and your income isn’t keeping up with that, then your quality of life is deteriorating,” Alex Arnon, A policy analyst at the Penn Wharton Budget Model, said of inflation’s impact.
