Me-flation: Why knowing your personal inflation rate matters

Rising prices don't mean the same thing for everyone's wallet. Here's how to calculate your personal inflation rate.

Me-flation: Why knowing your personal inflation rate matters
FIDELITY VIEWPOINTS 09/13/2022

We don't need to tell you about the impact of inflation—you see it for yourself at the grocery store and the gas pump. But rising prices don't mean the same thing for everyone's wallet. You have a personal inflation rate that's all your own, based on where you live and how you spend your money. So maybe you are seeing 8.5% inflation, but maybe you're not. Here's how to figure out your personal inflation rate, starting with a couple of hypothetical examples.


Ted owns his tiny but expensive New York apartment, takes the subway to work and orders an embarrassing amount of take-out. His personal inflation rate is likely lower than average because his housing cost is relatively fixed and other categories where he spends a lot of money have lower rates of inflation.




The reverse is true for Luisa, who rents a place in Atlanta. She recently bought a fuel-efficient car but packs her lunch and cooks at home as much as possible to save money. Her personal inflation rate is likely higher than average.

Knowing your personal inflation rate can help you save and spend smarter so you can reach your long-term goals.

THE BUILDING BLOCKS

The US inflation rate starts with the prices of about 80,000 different items each month, from shoes to rent. The Bureau of Labor Statistics (BLS) gathers these prices and uses them to create the Consumer Price Index (CPI).

Look around your kitchen, and most things you see will likely be reflected in the CPI. (The things that aren't in the CPI, like kitchen cabinetry and wall tile, are part of the Producer Price Index, but that's a different story).

Image of a kitchen illustrates the wide range of items included in the CPI. Items labeled with their 1-year inflation rate as of July include pet food 10.9%, fresh fruits 9%, major appliances 4.6%, breakfast cereal 16.4%, roasted coffee 20.7% and eggs 38%.  
Source: Bureau of Labor Statistics. See footnotes for more details.

The BLS then groups all 80,000 items into 200+ detailed categories and then into 8 expense categories:



Food & beverages

Breakfast cereal, milk, coffee, chicken, wine, full-service meals, snacks



Housing

Rent of primary residence, owners' equivalent rent, utilities, bedroom furniture



Transportation

New vehicles, airline fares, gasoline, motor vehicle insurance



Apparel

Men's shirts and sweaters, women's dresses, baby clothes, shoes, jewelry



Medical care

Prescription drugs, medical equipment and supplies, physicians' services, eyeglasses and eye care, hospital services



Recreation

Televisions, toys, pets and pet products, sports equipment, park, and museum admissions



Education & communication

College tuition, postage, telephone services, computer software and accessories



Other goods & services

Tobacco and smoking products, haircuts and other personal services, funeral expenses

But you don’t spend as much on haircuts as you do on housing, so the BLS gives each category a relative importance. Housing, transportation, and food make up the lion’s share of the CPI—just like they make up most of your personal budget. So a big increase in gas prices will have a larger impact on the inflation rate than a large increase in apparel. Here’s how the categories are weighted as part of the overall inflation rate:

Illustration shows the relative weight of the 8 main categories in CPI: housing 42.4%, transportation 18.2%, food and beverage 14.3%, medical care 8.5%, education & communications 6.4%, recreation 5.1%, apparel 2.5%, and other 2.7%.

The BLS does its best to create a standard measure. But no two people spend their money the same way. Renting, buying a car, driving a lot—all of these things would give you a higher personal inflation rate. If you own a home and eat out a lot, on the other hand, you might experience less inflation. (Why eating out? Because the cost of food at home is rising faster than the cost of eating out. Of course, that doesn't change the fact that eating out is still more expensive than eating at home.)

THE GEOGRAPHICAL DIFFERENCES

Inflation rates vary widely around the country. These differences are partly because of regional quirks—maybe food items don't have to travel as far to get from farm to table, for example—but they are also because some spending patterns are regional.

US map shows the inflation rate by sub region: New England and the Mid Atlantic both 7.3%, South Atlantic 9.5%, East South Central 8%, West south central 9.7%, East north central 8.8%, West north central 8.1%, Mountain 9.6%, Pacific 7.8%.
Source: US Bureau of Labor Statistics, July 2022

The size of your city matters too. It won't surprise you that people in smaller cities spend less on housing, but they spend a larger share of their budget on transportation and food at home. In spite of housing, those smaller cities tend to have a slightly higher rate of inflation (8.6%) than larger cities (8.4%).

WHAT YOU CAN DO

Here's what all this means for Luisa and Ted—and you:


Ted's me-flation rate is lower than average because he:

  • Owns a home, which insulates him from rising rent and property prices.
  • Uses public transportation, so he hasn't had to buy a car or fill its tank.
  • Eats out a lot, because the inflation rate for food away from home has risen more slowly than food at home.

This doesn't mean his cost of living is lower or that inflation isn't squeezing him: 8% inflation on takeout several times a week will really add up.




Luisa has a higher me-flation rate because she:

  • Rents her place (rent in Atlanta has gone up 12.8% since last year).
  • Bought a car in a year when car prices increased by 16% in Atlanta.
  • Eats at home, and grocery prices are up 13% in the past year.

Luisa won't have to buy another car for a while, so that will bring her me-flation rate down next year. To really insulate herself from a rising cost of living, she might consider buying a home.

In the short term, if you want to trim your personal inflation rate in a meaningful way, try focusing on the areas that are driving inflation the most today: energy, housing, and food. Here are some tips for cutting costs without drastically changing your life:

Keep an eye on your long-term plans as well. Rising prices today ultimately mean higher costs in retirement, so it's important to keep saving for your future goals. Read more about strategies for saving and investing:

Next steps to consider



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