Almost everyone is feeling the effect of steadily rising inflation, but how has the cost of goods and services personally affected you? If you’re a long-distance commuter, you might be feeling the cost of gas more, while a family with many kids will likely notice the increase in food prices more than others. To fully understand how inflation has taken a toll on your expenses, learn how to calculate your personal inflation rate—your PIR will give you the knowledge you need to make more informed decisions about your budget to ensure your savings stays on-track.

Understanding Inflation & the Consumer Price Index

Inflation rates have been on the rise for over a year now, thanks to the COVID-19 pandemic, supply chain issues, and the war in Ukraine. The rates are in the double digits, for the first time in decades, driving up the cost of gas, food, and other necessities.

The rates themselves are calculated by the consumer price index, or CPI, which is formulated around a total “basket” of goods and services. To be more specific, the Bureau of Labor Statistics calculates the index as the weighted average of 94,000 price quotes collected from retail items, service establishments, and rental housing units every month.

The published CPI is then used to measure inflation; CPI also impacts the cost-of-living adjustment announced each year, which dictates how much more social security recipients will receive the following year.

Average Inflation Rate in the United States

Since 2012, the inflation rate in the US has rarely jumped more than 2% in any given year. The combination of the COVID-19 pandemic, supply chain disruptions, and the war in Ukraine created the perfect storm for inflation to jump significantly in 2021, a 7% increase from 2020. From 2021 to 2022, it jumped 8.3%, and this number could go up even further after the last months of the year are factored into the annual percentage.

Calculating Your Personal Inflation Rate

Because the national CPI is calculated using a general bucket of goods and services, it can be useful to calculate your personal inflation rate to understand how much (or how little) inflation has been directly affecting your budget and spending. Your purchases are likely very different from your neighbor’s, and are certainly different than a person who is much older or younger, living in a totally different state, making a lot more (or less) money than you. By calculating your personal inflation rate, you can make smarter choices about your spending habits to stay in control of your savings. Here’s how to do it:

1. Categorize Your Spending Habits

Review your banking and credit card statements from the past year, and bucket your expenses by category. Categories could be reflective of The Bureau of Labor Statistics own buckets, including:

• Food (both groceries and food purchased away from home)
• Gas
• Clothing
• Medical expenses
• Educational expenses
• Shelter and related utilities (rent/mortgage, utilities)
• Transportation costs (car payments or mass transit fees)
• Apparel
• Recreation and entertainment

Make sure to plug in the figures into a spreadsheet so you get a sense of how much you spent over the entire year, as well as a month-by-month comparison. Don’t forget to include a place to include large, miscellaneous charges that occur once-per-year or once–per-quarter, like some auto insurance payments.

2. Calculate Your Category “Weights”

Now that you know how much you spent on different items and experiences over the past year, you can get a sense of what percentage of your money is going where, and this is how you calculate the category weights. If you spend 35% of your income on shelter/housing, and 10% on gas, the weights for these categories would be .35% and .10%, respectively.

3. Compare Against the BLS Table of Detailed Expenditure Categories

Now it’s time to go back to the categories that the Bureau of Labor Statistics has outlined, and compare your buckets to theirs. You’ll see that in the third and fourth columns, they’ve labeled as “unadjusted percent change”—these columns reveal the pricing change for each item, one by month and one by year. For bread, you can see that from July to August 2022, the price increased 2.2%, and from August 2021 to August 2022, it rose 16.2%.

4. Multiply the Category Weights

Now multiple your personal category weights by the annual percentage change for that category, as cited in the BLS spreadsheet. Using the numbers above, your rent category weight calculation would be .35 x 6.3 = 2.205%.

5. Determine Your Personal Inflation Rate

Next, add up all the category totals you calculated in the last step. The final number is your personal inflation rate percentage for the last year.

6. Compare Your Rate to the National Average

Now you can see how your personal rate compares to the national average. If the total is lower than 8.3%, your personal inflation rate is lower than the average American’s; if it is higher, however, your rate is exceeding the average, and you might want to look at some tactics to lower your spending until inflation levels out.

Some Caveats

The calculation, unfortunately, doesn’t include any spending done using cash. It also doesn’t factor in the fact that you’re likely already spending with inflation in mind: you might be shopping for things on sale or driving less to save on gas money. These factors skew your results a bit, but the percentage you get back should still be relatively close to a perfectly accurate one.

What Americans are Doing to Combat Household Inflation

There are many ways to curb your spending during this period of high inflation. Consider:

• Pay down debt with adjustable interest rates, such as credit card debt
• If you can, delay the purchase of any items that have risen in cost, such as travel or new cars
• Consider refinancing an adjustable rate mortgage to a fixed-rate one
• Delay the purchase of second/vacation homes
• While many workplaces have announced raises to adjust for inflation, if yours hasn’t—now’s the time to ask for one
• Take a fresh look at your retirement plan to see how the inflation has impacted your plan

Final Thoughts

Doing the tedious work of sitting down and throwing all your finances into a spreadsheet will help you budget better under these extraordinary financial circumstances. If you want more help, speak with a dedicated retirement planner to confirm you’re saving enough money to weather the storm and later, pay for your golden years.

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