What's Your Personal Inflation Rate

Last Updated Dec 18, 2010 10:48 AM EST

Despite the Fed's attempts to create more inflation, the recent CPI numbers indicate there isn't much. According to the official numbers, CPI clocked in at a paltry 1.1% on a year-over-year basis. But that might differ from your personal rate of inflation. The impact inflation has on your financial life depends on your spending patterns, and you can change some of that.

So who is experiencing the smallest amount of inflation in this economy? Well, if you can answer yes to the following questions, then you're in the inflation sweet spot:

  1. Your kids are out of the house and educated
  2. You're healthy and don't visit the doctor much
  3. You have a short commute and don't drive much, and
  4. You recently bought some durable goods, like a refrigerator or an oven ...
If this looks like your life, then you probably haven't experienced much inflation over the last few years. Why? Because since 2008, education costs have risen 13.8%, medical care has risen 8.8%, gas has risen 30%, and consumer durables (things like appliances) have fallen 1.3%. So if you don't have kids in college (or kids you still need to educate), don't incur many health bills, don't use much gas, and like to buy things like big screen tv sets, you've had it pretty easy.

One of the problems with the CPI figure is that it's based on a hypothetical basket of goods and services, some of which you may use and some of which you may not. So if your life requires you to spend more on things that are going up, like education and health care, and less on things that are going down, like refrigerators, then your personal CPI may be much higher.

Housing is a good example. Rents haven't risen much over the last few years, so from a CPI standpoint, people have benefited from the lower cost of housing. But if you already own a home you bought in 2004, the lower cost of housing isn't helping you. Your mortgage is the same.

You can't really blame the government for some of the shortcomings in the CPI figures. They have to make some assumptions about how people spend money and that forces them to generalize. While CPI may be 1.1%, not many people may be experiencing that exact rate. You may be seeing numbers much higher, and others seeing them much lower, depending on your spending patterns.

Can you do much to change your personal CPI? Sure.

  • In the housing area, while you might not be able to move, you can consider re-financing if you haven't done so yet. That will lower your cost of housing.
  • Next time you buy a car, maybe you buy one that gets much better mileage, and even consider a slightly used car.
  • For utility costs, get a programmable thermostat and then caulk every nook and cranny in your house.
  • If you spend money on health care, look at ways to substitute generic drugs for name brand, or work to improve your health, which may reduce the amount of maintenance medications you need to take.
  • When you go to the grocery store, you can buy fewer prepared meals and focus more on the basics.
  • And in areas like appliances and clothing, costs are coming down, and if you're a bargain shopper, you might even pay less than you did a few years ago for the same stuff.
Bottom line. There are things you can do to change your personal rate of inflation. And with overall inflation this low, you might be able to actually reduce your total cost of living.

Learn More: Want to learn about a simple way to manage your personal finances and prepare for retirement, investigate my new book Your Money Ratios: 8 Simple Tools For Financial Security, available in bookstores and at amazon.com The Wall Street Journal called the book "one of the best finance books to cross our desks this year." WSJ 12/19/09.