Inflation at highest since 1981. How does your personal rate compare?

Grocery shopping in Rosemead, California on April 21, 2022.

Frederic J. Brown | Afp | Getty Images

Inflation jumped to a new 40-year high in June, the U.S. Bureau of Labor Statistics reported Wednesday. That means the prices Americans pay at the gas pump, grocery store and elsewhere have been rising much faster than normal this year.

That may lead you to wonder: How much have my personal household costs increased, and how does that stack up against the average American’s?

Calculating your personal inflation rate can help answer these questions.

The Consumer Price Index is a common inflation measure. Households paid 9.1% more money in June 2022 for a broad basket of goods and services relative to that same basket in June 2021 — the largest annual jump since November 1981.

More from Personal Finance:
What Americans are doing to prepare for a recession
Even if you don’t drive, you’re getting stung by higher gas prices
These 10 U.S. real estate markets are cooling the fastest

However, your basket is likely different. For one, purchases and consumption habits vary from household to household, based on factors such as income, age and geography, according to Brian Bethune, an economist and professor at Boston College.

This means your personal inflation rate likely diverges from the U.S. average, too.

There are a few ways to calculate your inflation rate. The pitfalls of such a calculation came into focus 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. President Joe Biden cited that agriculture trade group in 2021 when the White House said costs for an Independence Day BBQ had decreased 16 cents relative to 2020.

How to calculate your personal inflation rate

Here’s the simplest way to get a rough estimate of your personal annual inflation rate, according to economists.

  1. The first step is to determine how much of your spending falls into certain categories or buckets, such as food, energy, clothing, housing and entertainment.

    To do this, you’ll need to consult your bank and credit card statements for the past year to find exact spending amounts. The U.S. Bureau of Labor Statistics publishes a detailed list that can help you itemize your purchases by category.

  2. Calculate your category “weights.” This weighting is basically the share of your spending devoted to specific buckets. The consumer price index calls this weighting “relative importance.”

    To do this, tally your total spending within categories. Divide each number by your aggregate annual spending to calculate the category weight.

    For example, let’s say my total household spending from June 2021 to June 2022 was $50,000. I spent $17,000 (or 34% of the total) on rent and $6,000 (or 12%) on groceries. Their category weights would be 0.34 and 0.12, respectively.

  3. Reference the BLS table of detailed expenditure categories again. The “unadjusted percent change” column shows the average annual percent increase in price for each item.

    For example, rent payments increased 5.7% in the year through June. The price of food at home (groceries) rose 12.2% in the same period.

  4. Multiply the category weights in step 2 by the annual percent change for those categories in step 3. Using the above example, you’d multiply 0.34 x 5.7 for the rent calculation. Multiply 0.12 x 12.2 for food. And so on for all other spending categories.
  5. To determine your personal inflation rate, add up the category totals from step 4. (In the above example: 1.938 + 1.464 + etc.) This total is your annual inflation rate expressed as a percentage.
  6. Compare your rate to the national average. For annual spending through this June, a percentage that’s lower than 9.1% means your costs haven’t increased as much as the average American.

    A higher number means your costs have risen more in the past year. Of course, households generally think in terms of dollars and cents, not percentages.

A more precise way to calculate your rate

Using cash, shopping sales can skew results

Further, costs aren’t rising in a vacuum. If you’re working, your income has likely increased, too. Average wages are up 6.1% in the past year, according to the Federal Reserve Bank of Atlanta. They haven’t kept pace with the average inflation rate, but more household income erodes some of the 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, associate director of policy analysis for the Penn Wharton Budget Model, said of inflation’s impact.

Correction: Inflation rose at its fastest pace since November 1981. A previous version misstated the month.

Source: https://www.cnbc.com/2022/07/13/inflation-at-highest-since-1981-how-does-your-personal-inflation-rate-compare.html