facebook twitter instagram linkedin google youtube vimeo tumblr yelp rss email podcast phone blog external search brokercheck brokercheck Play Pause
Inflation Varies From Person To Person Thumbnail

Inflation Varies From Person To Person

What do you think inflation will be in the coming years? It actually varies according to variables like your age and spending patterns. Inflation deals strong blows to people with kids in college but might be hardly noticeable to stay-at-home types. Recent inflation will shock someone in the market for a used car, but might be a yawner for someone shopping for a new car.

Inflation is best explained as a sustained increase in prices for general goods and services in the economy and is usually measured annually. Theoretically speaking, as inflation rises, every dollar you use buys a smaller amount of a good or service.

While the reported inflation rate (typically reported as the Consumer Price Index or CPI) is important for Social Security income calculations because they rise with the index, this rate may not accurately reflect your individual inflation rate.

The Summer of 2021 & Inflation

On June 10th, the U.S. Bureau of Labor Statistics (BLS) announced that the CPI increased 0.6% in May after rising 0.8% in April.

Maybe more importantly however, the BLS reported that the overall inflation rate rose to 5% this past year. This is the largest 12-month increase since the period ending August 2008 when a 5.4% increase was reported. But the 5% annual inflation figure disguises a large range among the individual components of inflation – and it will hit each of us differently.

Inflation Components

Consider that:

  • The index for food rose 2.2% over the past year
  • The index for full service meals rose 4.1% over the last 12 months, the largest 12-month increase since October 2008
  • The household furnishings and operations index increased 1.3% in May, its largest monthly increase since January 1976
  • The index for new vehicles rose 3.3% over the past 12 months, its largest 12-month increase since November 2011
  • The index for used cars and trucks increased 29.7% over the past year
  • The index for motor vehicle insurance rose 16.9% over the past year
  • The energy index rose 28.5% over the past 12 months
  • The gasoline index rose 56.2% since May 2020, the largest 12-month increase since the period ending April 1980
  • The medical care index rose 0.9% over the past 12 months, its smallest increase since the period ending March 1941

In other words, if you happen to be in the market for a new car, I’ve got good news for you. The inflation on new cars is only 3.3%, which is less than the overall inflation rate of 5.4%. Unfortunately, if you are looking to purchase a used car or truck, prepare yourself for some sticker shock as used cars and trucks have increased roughly 6x faster than the currently high inflation rate.

Oh, and when you’re ready to insure your new car… well that’s way up in price too.

It’s not all bad news as the cost of medical care has slowed down.

Inflation is Personal

While there are some financial expenses we must just accept, there are plenty of expenses and lifestyle choices we have control over. When people are planning to retire, they often ask how to calculate the future rate of inflation. This is because projecting future price increases is essential in helping to anticipate their annual income needs.

Unfortunately, there isn’t a magic number. Frequently, the assumed number can be flawed and can vary significantly from one family to the next.

As an example, if you enjoy taking trips, you will probably pay lots of service expenses like hotels, eating out and transportation. Because of this, you should expect travel inflation to hit you harder than the reported CPI. Travel expenses tend to increase in the early years of retirement and slow later on as people take fewer trips.

Alternatively, if you are a homebody who performs your own property improvements and does your own yardwork, then you will likely encounter lower inflation levels relative to your globe-trotting friends (although lumber prices have skyrocketed over the past year).

The key takeaway is that your personal inflation rate is unique as it is based on your age and lifestyle. The CPI number that you see in the headlines is best used only as a general gauge.

The more we consider prices as they relate to goods of the economy – and the lifestyle of the investor – the more accurate we can be in estimating an inflation number. For now, car dealerships are loving the higher prices for used cars and trucks.

Talk to your financial advisor to make sure you accurately project for inflation as you begin to think about your retirement plans.