What's your real inflation rate?
Headline inflation is spiking but it doesn't tell the full story with some households disappropriately affected. Here's how to calculate your own personalised inflation rate.
If you've been paying even passing attention to inflation, and it has been hard to ignore, you know that the latest inflation readings have been ugly. Headline inflation spiked to 3.5% in December last year, its fastest annual pace in Australia since 2014. Inflation rates in the US, UK, Germany and Canada are at their highest in decades amid rising prices of fuel, food and building materials.
What you may not have stopped to think about, though, is that the consumer price index (CPI) is a blunt instrument because it aims to reflect the experiences of consumers at large. To calculate the CPI, the Reserve Bank of Australia uses a consumption basket of goods and services, with each item weighted by how much of the typical household's budget it represents. Categories like housing receive the biggest weighting in the CPI calculation, while communication and apparel get smaller weightings.
Source: Reserve Bank of Australia
But what your household spends money on almost certainly differs from the typical Australian household. Take, for example, a new homeowner who has a sizable mortgage and is also making substantial home improvements while simultaneously purchasing furnishings, window treatments, and garden implements. Housing-related outlays are apt to be a bigger share of the new homeowner's budget than is likely to be the case for the population at large. Meanwhile, a retired older adult who no longer has a mortgage will likely have smaller housing-related outlays, as a percentage of household spending than the general population, but healthcare expenditures may well be a bigger share of the budget.
Calculating your own
Given those variations, it can be helpful to use the CPI's weightings as a starting point for understanding inflation's impact on your household and how aggressively you need to defend against it. But you can get closer to a personal inflation rate by looking at your actual spending in each of the major categories and blending that with the inflation we're seeing in those areas.
On this spreadsheet, you can input your spending in each of the major categories, then calculate a personalised inflation rate that incorporates inflation by spending category. We've populated it with some sample data (including US inflation rates per catgeory), but you can look back on your actual spending over the past year; you can also tweak the inflation expectations for each line item to align with your own experiences.
One factor that will probably jump out as you calculate a customised inflation rate is the importance of transportation costs in driving recent increases in inflation. If you've had to purchase a car over the past year or even if you just frequently fill up the tank, you've probably seen a substantial increase in your outlays to get around. City dwellers who bike or walk, on the other hand, have been much less affected by rising transport prices.
MORE ON THIS TOPIC: Why petrol prices are soaring and how you can cut costs at the pump
As interesting as it can be to come up with a personalised inflation estimate, it's important to not come away with a false sense of precision about inflation. For one thing, inflation statistics are ephemeral: The one-year figures provided in the spreadsheet capture price changes in various categories amid a booming economy and supply-chain disruptions.
Moreover, the number that really bears paying attention to is the trend in your actual, all-in spending, which depends on a few key variables: your fixed and discretionary expenses as well as what's going on with inflation in each of the spending categories. Ultimately, your actual household spending trend matters more than examining inflation on a small scale because you exert a level of control over some of your spending, whereas inflation is out of your hands.
Inflation for older Australians
Life stage tends to play a role in the inflation experience, too, as reflected in the RBA’s Selected Living Cost Indexes. These indexes measure the price change of goods and services and their effect on living expenses of selected household types including age pensioners and self-funded retirees. The difference in the inflation rates owes to differences in the consumption baskets of older adults and the general population. For example, food expenses make up a higher proportion of the age pensioner household subgroup than other subgroups. Other key costs include healthcare costs and, recreation and culture.
Over the past year, the Living Cost Index (LCIs) rose 3.3% for self-funded retirees and 3.4% for aged pensioners. The Australian Bureau of Statistics found that transport was the main contributor to the annual increase, with the price of Automotive fuel rising 32%.
"Food makes up a higher proportion of overall expenditure for Age pensioner households compared to other types of households,” head of prices statistics at the ABS, Michelle Marquardt said.
“Age pensioner households also experienced the highest annual increase for housing costs, with relatively higher expenditure levels on maintenance and repair and property rates.”
Additional reporting from Emma Rapaport, editorial manager, Morningstar Australia