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It’s no surprise to hear that prices are rising in the US economy, whether at the grocery store or at the gas pump.
But how much have your personal household expenses increased, and how do they compare to the average American?
Calculating your personal inflation rate can help answer these questions.
The consumer price index is a common measure of inflation. In May 2022, households paid 8.6% more money for a broader basket of goods and services compared to the same basket – the largest annual jump in more than 40 years.
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However, your shopping cart is likely different. For one, according to Brian Bethune, an economist and professor at Boston College, buying and spending habits differ from house to house depending on factors such as income, age and geography.
This means that your personal inflation rate can also deviate from the US average.
There are several ways to calculate your inflation rate. The pitfalls of such a calculation came to the fore Monday when Nikki Haley, a former US ambassador to the United Nations during the Trump administration, tweeted an incorrect estimate for a July 4 cookout.
(His tweet, which has since been removed, reporting a grill as 67.2% more expensive than last year. By comparison, the American Farm Bureau Federation said costs increased 17% — a very small increase, although still increasing. President Joe Biden Cited This agricultural trade group in 2021 when the White House said the cost of Independence Day barbecues was reduced by $0.16 compared to 2020.)
Calculate your personal inflation rate
This is the easiest way for economists to estimate your personal annual inflation rate.
- The first step is to determine how much of your spending falls into specific categories or buckets, such as: B. Food, energy, clothing, housing and entertainment.
To do this, you need to consult your bank and credit card statements for the previous year to know the exact amounts spent. The US Bureau of Labor Statistics publishes an extensive list that can help you organize your purchases by category.
- Calculate your “weight” category. This load is basically the portion of your spend that is destined for each bucket. (The CPI refers to this weighting as “relative importance.”)
To do this, add up your total expenses within the categories. Divide each number by your total annual spend to calculate category weights.
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 square weights are 0.34 and 0.12, respectively.
- Recall the BLS table for detailed cost categories. The Unadjusted Percent Change column shows the average annual percentage price increase for each item.
For example, rent payments increased 5.5% in the year to May. The price of groceries (groceries) in the home increased by 11.9% over the same period.
- Multiply the category weights in step 2 by the annual percentage change for those categories in step 3. In the example above, you would multiply 0.34 x 5.5 to calculate rent. Multiply 0.12 x 11.9 for food. And so on for all other expense categories.
- To find your personal inflation rate, add up the sums of the categories from step 4. (In the example above: 1.87 + 1.428 + etc.) This is your annual inflation rate, expressed as a percentage of the total.
- Compare your rate to the national average. For annual spending as of this May, a percentage less than 8.6% means your expenses haven’t increased as much as the average American.
A higher number means your expenses have increased over the past year. Of course, families usually think in terms of dollars and cents, not percentages.
A more accurate way to calculate your fare
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The calculation above compares your home experience to that of the average American based on differences in goods and services and the amount each household buys. However, the formula uses the price average for those goods and services – meaning it’s not an overly personalized calculation.
Consumers can perform some additional calculations to get a more accurate understanding of how their personal household expenses have changed from year to year:
- Reconcile all expenses on your bank and credit card statements for the last 12 months and for the last 12 month period.
- Subtract the total and divide by the first year’s expenses. For example, let’s say my expenses from May 2021 to May 2022 were $50,000 and from May 2020 to May 2021 were $45,000. Divide the difference ($5,000) by $45,000.
- In Step 2, multiply that number by 100 to find 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 some caveats. For one thing, you probably won’t be able to cash in on expenses incurred. It’s also possible that you’ve looked for cheaper alternatives where possible (e.g. as a substitute for cheaper groceries) or perhaps driven less to save on gas.
This means that your calculations may not be 100% accurate, but they are in the ballpark.
In addition, the costs do not go to zero. If you work, your chances of earning an income have also increased. According to the Federal Reserve Bank of Atlanta, the average salary has increased by 6.1% in the past year. They have not kept pace with the average rate of inflation, but higher household incomes are relieving some of the financial stress.
“If you have to spend more dollars to get the same items and your income doesn’t match that, your quality of life deteriorates,” Alex Aron, associate director of policy analysis for Penn Wharton’s budget model. About the effect of inflation.
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