What’s Your Rate of Inflation?

on May9
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Inflation is at the highest level in four decades. But how you experience it can vary greatly depending on what you eat, how much you travel and your other spending habits. Answer seven questions to estimate your personal inflation rate.

The numbers above are derived from the Consumer Price Index, the best-known measure of inflation. The C.P.I. is based on a “basket of goods”: The prices of hundreds of commonly purchased goods and services, from cookies to cars to college tuition, are blended together, with each product counted in proportion to its share of overall spending.

Clothing, for example, accounts for about 2.5 percent of the average American’s monthly spending, so clothes prices make up that share of the index. But those are averages — if you spend more than 2.5 percent of your budget on clothes, your personal rate of inflation will look different.

Prices are rising pretty much across the board now, but the increases are particularly rapid in some categories, like meat, cars and travel. People who spend a lot on those categories are experiencing much faster inflation as a result.

The calculator above adjusts your rate of inflation based on how much more or less you spend on different products than the average American. It doesn’t account for other factors, like whether you live in a more expensive part of the country or are more likely to shop around for bargains. Even so, it reveals a wide range of different experiences: Based on how you answered the questions above, you might have a “personal inflation rate” as low as 5 percent or as high as 15 percent.

Even a 5 percent inflation rate is high by the standards of recent history – before the pandemic, prices in the United States were rising about 2 percent a year. But when it comes to inflation, small differences have a big impact. At 5 percent, prices double in about 15 years. At 7 percent, prices double in just over 10 years. And at 15 percent, prices double in only five years.

Oil price boom

Perhaps the clearest case study in how people experience inflation differently is gasoline.

Gas prices have shot up in recent months, partly because Russia’s invasion of Ukraine roiled global energy markets. Prices were up 48 percent in March from a year earlier, accounting for a fifth of the increase in the overall Consumer Price Index.

Gas prices are a major factor driving inflation

Change in the Consumer Price Index since February 2020, with and without gas

Source: Bureau of Labor Statistics

But if you don’t own a car, or drive infrequently, then gas prices may not matter much to you, at least not directly. (You won’t be immune from indirect effects, like higher prices of other goods because of increased transportation costs.) On the other hand, if you have a long commute, or you live in a rural area where even routine errands require driving long distances, gas may eat up a big chunk of your monthly budget.

Another energy-related example: Heating oil gets hardly any weight in the overall index because most Americans don’t heat their homes with oil. But if you’re among the roughly 6 percent of families that do, then heating oil is a major expense for you – and with heating oil costs up 70 percent over the past year, your rate of inflation is almost certainly far higher than the overall average.

The curious case of cars

New and used cars each account for about 4 percent of Americans’ total spending in a typical year — and prices for both have skyrocketed recently because of supply chain disruptions and other issues. New car prices are up 12.5 percent over the past year, and used cars are up an even crazier 35 percent.

If you weren’t in the market for a car in the past year, then soaring vehicle prices didn’t matter to you — their weight in your own personal “basket of goods” was zero. And if you did buy a car recently, chances are it made up a lot more than 4 percent of your spending. In the calculations above, we assume that if you bought a car, it accounted for a large part of your annual budget.

You might have noticed an interesting twist in the calculator: If you bought a new car (and didn’t also buy a used one), your rate of inflation went down. That’s because we’re dropping used cars from your personal basket — and used car prices have risen so much that they are a major factor in inflation overall.

What the C.P.I. and similar inflation indexes measure is how much more it costs to buy a set of goods and services today than it did to buy that same set of goods and services a year ago. For many products, that makes sense. You probably eat roughly the same amount of food and wear through roughly the same number of socks from one year to the next.

Most families don’t buy a car every year, though, which means this kind of year-to-year comparison doesn’t quite make sense at the individual level. The same is true for washing machines, refrigerators or other big-ticket items.

For these products, it arguably makes more sense to think about inflation over a longer time: New car prices have risen about 13 percent over the past five years, for example, an average annual inflation rate of about 2.5 percent.

What about housing?

You may have noticed a category missing from the calculator above: housing.

For most of us, the cost of housing — whether in a rent check or a mortgage payment — is our biggest expense every month. And it’s the biggest component of C.P.I. as well, accounting for roughly a third of the total index.

But calculating housing inflation is complicated, especially for homeowners. That’s because, for most people, a home serves two purposes at once: It is a source of shelter and an investment. Investments aren’t included in measures of consumer prices, though, because they aren’t consumer spending. (When you put cash in your retirement account, you aren’t “spending” money; you’re saving it for the future.)

When determining inflation, economists care about the shelter aspect of homeownership: the “service” of providing a place to live. They can’t measure that directly — when you’re making your mortgage payment, you don’t distinguish between the “investment” part and the “shelter” part — so they measure it indirectly, by estimating what it would cost to rent out a similar home, a concept known as “owners’ equivalent rent.”

“Owners’ equivalent rent” is a theoretical concept, though. If we’re trying to understand a family’s real-world cost of living, it makes more sense to look at its actual monthly costs. If you have a fixed-rate mortgage, your monthly mortgage payment doesn’t go up when home prices rise.

In fact, if you refinanced your home in the past two years, as millions of people did, then your monthly expenses may have gone down — even when factoring in higher taxes or maintenance costs.

For renters, the situation is a bit more straightforward. The rental component of C.P.I. is based on how much rents have gone up or down across the country. But rent is such a big chunk of most people’s budgets, and it varies so much from city to city and even building to building, that a nationwide average doesn’t do a very good job of capturing any individual’s experience. Someone in a rent-controlled apartment in New York City may have experienced only a modest rent increase this year, while someone signing a new lease in a market-rate apartment next door could have seen a huge jump.

The chart below shows how much a household’s overall rate of inflation may have looked different based just on its housing situation. For homeowners, we’re assuming their monthly costs didn’t change at all. For renters, it makes a huge difference whether they have had to sign a new lease in the past year, and whether they live in New York, Las Vegas or another city where rents are rising rapidly — by 25 percent or more for new listings — or one where rent growth has been more modest, like Dallas or (perhaps surprisingly) San Francisco.






6%

higher

prices

than a

year ago

Estimated inflation rates for people with

different housing situations, assuming

their spending is otherwise average.

Renters with

a new lease in a

city where rents

are rising rapidly

Homeowners

with a fixed-rate

mortgage

Renters with a new

lease in a city where

rents are growing

modestly

Renters with

a modest

rent increase

6% higher

prices than a

year ago

Estimated inflation rates for people with

different housing situations, assuming

their spending is otherwise average.

Homeowners

with a fixed-rate

mortgage

Renters with a

modest rent

increase

Renters with a new lease

in a city where rents are

growing modestly

Renters with a new

lease in a city where

rents are rising rapidly

6%

higher

prices

than a

year ago

Estimated inflation rates for people with

different housing situations, assuming

their spending is otherwise average.

Renters with

a new lease in a

city where rents

are rising rapidly

Homeowners

with a fixed-rate

Renters with a new

lease in a city where

rents are growing

modestly

Renters with

a modest

rent increase

6% higher prices

than a year ago

Estimated inflation rates for people with

different housing situations, assuming

their spending is otherwise average.

Homeowners

with a fixed-rate

mortgage

Renters with a

modest rent increase

Renters with a new lease

in a city where rents are

growing modestly

Renters with a new

lease in a city where

rents are rising rapidly


Who’s experiencing the worst inflation?

There’s a lot our calculator does not take into account. We are assuming that prices for food and clothes and cars are rising at the same rate for everyone, for example. But prices can vary a lot based on exactly what product you buy and where you buy it. The Labor Department collects data on the price of steak, but it doesn’t distinguish between organic, grass-fed prime rib and skirt steak bought on “manager’s special.”

If you have children in day care or preschool, you might have been surprised to see your rate of inflation go down in the calculator. Child care prices are up 3.6 percent on average over the past year, according to the Labor Department. That’s a major hardship for many families given the already high cost of child care, but it’s lower than the overall pace of increases.

But depending on where you live, and whether or not you qualify for government-subsidized programs like Head Start or other factors, your child care costs may have gone up much more than 3.6 percent over the past year. That won’t be captured in the calculator. Recent research has found that this kind of variation in price changes within product categories — between different cuts of steak or brands of detergent or types of child care — may matter even more for inflation inequality than differences in spending patterns across broad categories.

Within the broad data from the Labor Department, there is evidence that poorer households were experiencing faster inflation than wealthier households in the years leading up to the pandemic. And research from the Federal Reserve Bank of San Francisco has found that inflation inequality — the gap between those experiencing the most inflation and those experiencing the least — tends to grow when prices are rising quickly. Inflation also tends to be harder on poorer households because they have less flexibility in their budgets, giving them less room to cut back on discretionary spending when prices rise.



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