What’s your inflation rate?

On Wednesday, the Nudge blog linked to David Leonhardt’s Wednesday column on people’s perceptions of inflation.

Price increases are simply more noticeable — more salient, as psychologists would say — than price decreases. Part of this comes from the notion of loss aversion: human beings dislike a loss more than they like a gain of equivalent size. If you have to sell your house for less than you bought it for, you’re really unhappy. You hate that ground chuck now costs $2.83 a pound, but you didn’t notice that oranges are 31 percent cheaper than they were a year ago.

For most people, the Consumer Price Index (or core inflation, if you prefer) is a relatively meaningless number – even if it provides a better picture of inflation than a gallon of gas. More meaningful is your personal inflation rate; the increase in prices of items in your household budget weighted by the amount of each item your buy.

Inflation rate variance among different groups is large, according to the Federal Reserve of New York, which published an interesting paper on household inflation data between 1987-2001. In 2001, for instance, the mean rate of inflation was 3 percent, but, even excluding outliers, 9 out of 10 Americans could fall somewhere between .5 and 5 percent.

Most of the differences can be traced to changes in the relative prices of education, health care, and gasoline. We find that cost of living increases are generally higher for the elderly, in large part because of their health care expenditures, and that the cost of living for poor households is most sensitive to (the historically large) fluctuations in gasoline prices.

Over the 15-year period, differences between the groups the Federal Reserve considered (elderly-non-elderly, white-non-white, poor-non-poor, urban-rural, kids under 18-childless) on the order of up to +/- .6 percent. (Read the paper here.) Interestingly, despite the relative stability of household purchases, household inflation also varied from year-to-year.

A few financial web sites provide calculators where people can input their monthly expenditures for eight major categories and find out how much their own personal inflation rate differs from the CPI (see one here). The British Office for National Statistics has gone a step further, unveiling an online personal inflation calculator last year with 12 categories of household goods, plus your mortgage (or rent), utilities and car/home insurance, and car/vehicle repairs. In addition to calculating a percentage rate, the web site graphically displays how your inflation rate has tracked the overall national rate for the last 12 months.

We are curious what readers think about the usefulness of a personal inflation rate. Does knowing it affect purchasing decisions? Perception about the state of the economy? Is knowing your rate just another factor to file away in the back of your head? Is it likely to just increase dissatisfaction, especially among those at the high end. Could policymakers use this information to help individuals meet some of their financial (or non-financial) goals?

One Response to “What’s your inflation rate?”

  1. Mahesh Sethuraman Says:

    Hi,

    Its a very good idea. I have been thinking about this for a long time now. Currently in India we have more than 11% inflation but personally except for a 5 rupees hike in petrol prices nothing else affects me much. In fact so many of my high usage goods and services have seen a fall in prices. Mobile tariffs are going down all the time in India courtesy competition, Internet is getting cheaper, Music CDs and Movie DVDs are getting damn cheaper, all electronic gadgets are getting cheaper – For someone in the middleclass like me greater part of my expenditure are in these areas and food occupies a much lesser proportion of my monthly expenditure. So a general inflation number hardly makes any sense for me as an individual.

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