I’ve been reading a lot about inflation lately and the potential impact it can have on households. I’ve also received questions from clients about inflation projections going forward. Some of the current thoughts around this issue relate to a “personal inflation rate.” In other words: How does the current inflationary environment affect individuals?
This makes sense to me, as everyone spends their money differently. Budgets tend to be more impacted in the areas where you absolutely need to spend money, or the non-discretionary part of your budget. Of course, if the high levels of inflation continue, the potential for inflation to impact the discretionary part of your budget may also become an issue.
Breaking it down, non-discretionary expenses are things like mortgage or rent payments, insurance premiums, car payments, food, energy usage, water, school tuition, etc. Discretionary expenses potentially include personal travel, dining out, club dues, alcohol consumption, new cars, new homes, etc. – all things that consumers can adjust their spending habits on to account for the sensitivity of their household budget to inflation.
My ‘Personal Inflation Calculator’
In the interest of trying to work through this on my own, and to provide guidance to our clients who are concerned about the impact of inflation on their own planning, I created a “Personal Inflation Calculator” using the latest numbers from the Bureau of Labor Statistics. If you’ve never looked at the monthly reports from the BLS, they are quite extensive, and cover quite a few common budget items. They are also broken down into “seasonally adjusted” and “unadjusted” inflation rates for each item.
Seasonally adjusted numbers take into account normal inflationary increases due to seasonal adjustments and removes their impact from the calculation. For example, gas prices tend to increase around holidays and the summer vacation travel period. Other items’ prices may increase or decrease around the winter holidays. Unadjusted rates just look at the raw numbers and increases in prices from period to period.
Based on the current economic environment, and the rapid pace of inflation, I’m focusing only on the unadjusted inflation numbers from May ’21 to May ’22. Seasonally adjusted estimates will most likely differ in some respects, but the unadjusted rate should give us a worst-case scenario. As stated in the BLS May report, “The unadjusted data are of primary interest to consumers concerned about the prices they actually pay.”
The worksheet I created takes some of the most common categories of household expenditures and allows us to enter annual amounts for those categories. The inflation factor for each item is than applied, resulting in an estimated price for that item or service in the current period. We then total all of those …….