Inflation and CPI

[sgeeeee]

We end up talking about whether the CPI-U is really an accurate measure of our own personal inflation rate. It comes up related to I-bonds and TIPS and social security benefits.

But wasn't sure how I could develop an accurate estimate of my own personal inflation rate. The more I thought about it, the more complex the problem seemed. If you were such a creature of habit that you always bought the same things in the same quantities every year, it would be easy, but my personal spending varies significantly from year to year.

It turns out the Dept. of Labor provides a lot of information about CPI and includes a number of calculators that allow you to look at your spending profile in your region of the country.

US Dept. of Labor:
http://www.bls.gov/cpi/

CPI is developed using goods and services data collected throughout the month from 87 different urban areas throughout the country and from about 23,000 retail and service establishments. Data on rents are collected from about 50,000 landlords or tenants.
The weight for an item is derived from reported expenditures on that item as estimated by the Consumer Expenditure Survey.

The web site discusses why you might experience a very different inflation index: The Consumer Price Index--Why the Published Averages Don't Always Match An Individual's Inflation Experience
http://www.bls.gov/cpi/cpifact5.htm

I decided to look at how the CPI basket of goods and services compared to the salaryguru's experience last year. Here's the results

....................................Relative Importance
.....................................CPI-U
....................................average......s alaryguru
Expenditure category.(Dec.2001)......family
------------------------------------------------------------
Total (all items)............100.0...........100.0
Food and beverages.....15.7.............8.3
Housing.........................40.9............34 .4
Apparel...........................4.4............. 1.3
Transportation..............17.1............17.7
Medical care....................5.8............12.1
Recreation.......................6.0............15 .0
Education .......................5.8.............1.7
Other goods & services...4.3.............9.4
------------------------------------------------------------
Total, all items...............100.0...........100.0

The online tools allow you to look at the measured inflation of each expenditure category in each survey area. In theory, that would allow you to get a pretty good estimate of your own personal inflation rate. I haven't gone through that effort yet.

[Bob_Smith]

Thanks SG! This is an area where we tend to operate in the blind. I'm almost afraid to know my personal inflation rate when most variables are removed, but it should be very interesting to see how bad it really is - or isn't.

Thanks also for your synopsis of the motivation behind the privatization of SS in another thread. I think you nailed it, and I sent it on to my daughters and a few friends who are following it.

[gratefuled]

Interesting. Those categories roughly map to the ones I used in Quicken. If I have some time this weekend I might crunch a few numbers.

[sgeeeee]

Thanks SG! This is an area where we tend to operate in the blind. I'm almost afraid to know my personal inflation rate when most variables are removed, but it should be very interesting to see how bad it really is - or isn't.

hi Bob Smith,

I ran my own numbers last night. I found that my own personal inflation numbers were at 3.6% for 2004 -- just slightly higher than the national CPI. A higher than average health care cost was the primary culprit that pushed me up.

The area of the country and size of town you live in has a lot to do with your personal inflation rate. I haven't checked, but you probably benefit some from being in a smaller town.

[sgeeeee]

Interesting. *Those categories roughly map to the ones I used in Quicken. *If I have some time this weekend I might crunch a few numbers.

I wish mine were. I had to spend quite a bit of time translating my own budget numbers into the National Labor Board's categories. I'm thinking about changing my format because it could be useful to look at inflation of different items in the future. The online tools could turn out to be very helpful for that.

[Nords]

I found that my own personal inflation numbers were at 3.6% for 2004 -- just slightly higher than the national CPI.

Yes, but now you have to factor in your "hedonic adjustments".

No doubt your personal inflation was actually significantly BELOW the national CPI... please don't tell the Federal Reserve or Social Security.

[sgeeeee]

Yes, but now you have to factor in your "hedonic adjustments". *

Hi Nords,

Hedonic adjustments? I don't know. That just sounds dirty. I'm thinking that I probably want as much hedonic adjustment as I can get in my life. ;D

...............Yeah, seriously - even using the online tools and my own detailed budget numbers, I can't really tell how much hedonic adjustment is in there. I, personally, haven't felt like my personal inflation rate is that much higher than the national average. But that is just based on a gut level feeling. If you look at my budget breakdowns, it's hard to see how hedonic adjustments could be applied to very much of my own budget. Housing, transportation, recreation, medical care, food and apparel make up almost 90% of my budget. I'm not sure how the fed would apply hedonics to much of that. I may be wrong. :-/

Some of our posters seem to think their own personal inflation rate is significantly higher than CPI-U. It would be interesting if some of them looked at the regional and expense item distribution differences to see how much that might account for the difference they see.(This is a hint to other anal retentive numbers crunchers. I'm curious about how much personal inflation varies due to these other causes) :)