Inflation Varies According to Your Age & Spending

What will inflation be in the coming years? The real answer is that it varies according to your age and spending patterns. Inflation wallops someone with kids in college, and might be hardly noticeable to stay-at-home types. And recent inflation will stun someone looking for a used car, but might be a yawner for someone shopping for a new car.

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

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

The Summer of 2021 & Inflation

On June 10^th, the U.S. Bureau of Labor Statistics announced that the Consumer Price Index increased 0.6% in May after rising 0.8% in April.

But maybe more importantly, the BLS reported that the overall inflation rate rose to 5% this past year, which is the largest 12-month increase since a 5.4% increase for the period ending August 2008. But that 5% annual inflation figure masks a huge range among the individual components of inflation – and 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 are in the market for a new car, you’re in luck, as the inflation on new cars (3.3%) is less than the overall inflation rate (5.4%). But if you are in the market for a used car or truck, prepare for sticker shock as used cars and trucks have increased about 6x faster than the currently high inflation rate.

Oh, and to insure your car? Well that’s way up in price too.

On the other hand, the cost of medical care has slowed down (glass-half-full).

Inflation is Personal

We get to choose some financial expenses and lifestyle choices, although others we must accept. People planning to retire commonly ask how to calculate the future rate of inflation because projecting what price increases lie ahead is central to anticipating annual income needs. 

Sadly, there is no magic number. And often times the assumed number can be flawed and can vary significantly from one family to the next.

For example, if you enjoy travelling, you will likely incur many service expenses including hotels, dining and transportation, thus you should expect travel inflation will be higher than the reported CPI. Travel expenses tend to increase in the early years of retirement and slow later on as people take fewer trips. 

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

The key point is that your personal inflation rate is unique based on your age and your lifestyle. The headline CPI number is important 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 think about your retirement plans.