Many people inherently mistrust government statistics, especially when they don’t seem to mesh with their own personal experiences.  According to the Bureau of Labor Statistics (BLS) the official CPI-U inflation rate for all Urban Consumers from January 2007 to January 2008 stood at a moderate 4.3%. Why, then, do you hear so many murmurs around the internet and in the media about the coming hyperinflation?  For starters, people simply don’t trust the government.  The numbers don’t mesh with what they are experiencing anecdotally, so they are dismissed as “government lies”.  After all, THEIR expenses increased much more than 4.3%, so it must be a lie!

Lies, Damn Lies and Statistics

Sorry folks, but the government isn’t lying to you and you look silly in those tin foil hats.  The reason for this discrepency is much more benign.  The CPI-U (which yes, DOES include food and energy prices) reflects the AVERAGE basket of good purchased by the AVERAGE consumer.  In other words, nobody in the BLS sits around making up numbers on what they think people should be spending their money on.  The statistic is set by consumers themselves.  The problem, of course, is that nobody is average.

…or not  

According to the latest CPI-U report, Americans spend approximately 42% of their income on housing-related expenses (including taxes, insurance, etc) and about 6.2% on medical care.  Now imagine you are a retired couple with a paid-off house and a modest pension and social security income.  Chances are, your personal inflation rate is radically different from the official number.  Why?  Well you don’t have a mortgage so you aren’t likely to be paying anywhere near 42% of your income for housing;  however, you probably have much higher medical expenses than the average household.  Perhaps you are spending 20% of your income on medical care rather than the 6.2% of the average family.  Since medical care suffered the 2nd highest price increase over the past year (education was 1st), your actual inflation rate is probably significantly higher than the average.  No lies here, just different weights.  The basket of goods that you purchase happens to differ from the average and your personal inflation rate differs according.

The official weights cited in the CPI-U report are as follows (Source):

• Food:  14.992%
• Housing:  42.691%
• Apparel:  3.726%
• Transportation:  17.249%
• Medical Care:  6.281%
• Recreation:  5.552%
• Education:  3.076%
• Other Expenses:  6.433%

Know Your Personal Inflation Rate

Planning around the official inflation rate can cause you to dramatically underestimate how much money you will need to save to meet future financial goals such as retirement or college savings for your children. If you have a chronic medical condition, for instance, you will likely need far more income in the future than the official numbers would leave you to believe: planning on 3% could put you in the poor house. I’ve written a little form that will allow you to calculate your own personal inflation rate depending on the percentage of your income you spend in each category. Note, you must have Javascript enabled on your browser to use the personal inflation rate calculator.

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