Even when the official rate of inflation was muted in the dozen years following the Great Recession, families still felt the sting of rising costs.

Sure a computer may have become more affordable, but college tuition skyrocketed. Cheaper clothing made back to school shopping easier, but rising health insurance premiums were hard to bear. The job of a household was to negotiate these gyrating costs in order to make ends meet.

That task has only become more difficult over the past year as U.S. inflation woke up from its slumber. Prices are now rising at their highest rate in 40 years, and consumers have started noticing the trend.


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Getty Images.jpeg


There’s little you can do to stem the rising tide of inflation, unless of course you happen to be Jerome Powell. Instead, now is the time to get a firm grasp on your own personal rate of inflation, and employ strategies that will protect your bottom line.

What Is Inflation?

Let’s start by defining how inflation works. When the price for a quart of milk, or a gallon of gas to fill the car tank is more today than it was in the past, that’s inflation.

While rising prices are a drag on your personal purchasing power, a little bit of inflation isn’t a bad thing for the economy. It’s the juice that compels us to save and invest, rather than just keeping our money parked in cash.

Too much inflation, though, can be problematic. Right now, year-over-year prices are rising by 7.5%, and wages aren’t growing fast enough to keep up: inflation-adjusted earnings were actually down 1.7% in January compared to the year prior.

That’s why the Federal Reserve, whose job it is to keep prices stable, has announced that it will spend 2022 trying to get the annual rate of inflation closer to 2%.

A quick peek at bond prices, which are sensitive to rate hikes and inflation, show that traders believe that the Fed will eventually get things under control. But a longer-term perspective may be helpful if you’re feeling especially nervous about inflation.

“We tend to overweight current events,” said Christopher Sorrow, vice president at Dallas wealth management firm Probity Advisors. “From a planning standpoint, we’re experiencing runaway inflation for just a short period.”

Why Retirees Need to Plan For Inflation

All Americans are being impacted by the current spasm of high inflation.

Gen Z may be feeling it most in the cost of a used car or a night out on the town, but Baby Boomers are also in inflation’s crosshairs. A bracing case in point: The $70.10 monthly premium for Medicare Part B in 2022 is 14.6% higher than the premium charge in 2021.

“Inflation is a tax on everybody,” said Craig J. Ferrantino, founder of Craig James Financial Services in Melville, NY. “Each household’s spending is different, but right now the rise in prices is so broad everyone is being affected.”

For retired Americans, the biggest issue comes down to income. Workers have the ability to increase their earnings, especially in the current tight labor market. Retirees, on the other hand, typically need to stick to a fixed budget in order to avoid running out of money.

Social Security recipients receive a cost of living adjustment to their benefits, which helps take the sting out of inflation. In 2022 Social Security benefits are getting a 5.9% COLA bump. But with inflation so high, that may not be enough for many to avoid cutting back.

Even if overall inflation settles down from its current highs, it can still do plenty of damage to a retiree’s budget. A 3% annual inflation rate, for instance, would cause a basket of goods that costs $100 today to rise to more than $200 in 25 years. And for anyone eyeing age 65 as a retirement age, living at least another 25 years is a distinct possibility.

Interestingly, surveys show workers tend to be more fearful of inflation than current retirees. Those heightened concerns could reflect the fact that rising prices change the calculus on what pre-retirees need to save.

“If you’ve been putting away $1,000 a month for retirement, the future purchasing power of that $1,000 could be a lot lower if inflation stays high,” said Ferrantino. “If that $1,000 won’t be getting you as much later on, you might want to consider saving more now.”

How Official Inflation Rates are Calculated

There are two inflation calculations that get the attention of policy makers: the Consumer Price Index (CPI) and the Personal Consumption Expenditures index (PCE).

The CPI tracks prices for about 80,000 goods and services in 75 urban areas across the country, basing the prices on surveys of 6,000 households and more than 20,000 retail businesses.

The Bureau of Labor Statistics sorts the data points into eight major groups: food and beverages, housing, apparel, transportation, medical care, recreation, education and communication, and other goods and services. The CPI inflation calculation is a weighted average of those categories.

PCE also focuses on prices by measuring the cost of a basket of goods, but is weighted by what businesses are selling rather than by what consumers are buying. It also includes some costs that CPI doesn’t, such as health care paid by employer-sponsored plans, and deals with changes in consumer behavior differently.

These differences account for why CPI rates tend to be higher than PCE rates. While the former most recently clocked in at an annual rate of 7.5% recently, the latter was running at 6.1%.

You might also run into mention of “core” CPI and PCE. That’s code for a calculation that excludes food and energy. While both food and energy are household necessities, their volatility can make it hard to assess the more general pace of inflation.

Core PCE is the Federal Reserve’s favored inflation. The Fed wants core PCE to run at an annual rate of around 2%. In January, it clocked in at 5.2%.

The Importance of a Personal Inflation Rate

Would you describe yourself as average? While the official rates of inflation are important, they aren’t specific to your life and don’t account for all of the factors that go into your personal costs.

At a minimum, where you live can be a big factor. Real estate prices are jumping in cities like Nashville and Austin, making it more expensive to buy a home and ramping up property taxes.

So your personal inflation rate is a matter of how your household rolls. If you’re a remote worker, you’re likely not feeling the commuter pain of sharply higher gas prices—a gallon of regular unleaded gas is up more than 40% in the 12 months through January. Driving an EV? That’s a nice inflation move, as the price per KWH hasn’t budged in a year.

Vegan? You’ve managed to avoid the worst of food inflation. The cost of fruits and veggies rose 5.6%, on average, in the 12 months through January, compared to a 12.2% increase in prices for meat, poultry, fish and eggs.

How to Calculate Your Personal Inflation Rate

Your own personal inflation rate can be quite different from the national averages that are grabbing headlines. If you’re up for some Excel time, you can get a better sense of your personal inflation rate by plugging your costs into a spreadsheet and doing the math.

To keep it simple at the start, you might work with the same categories the BLS uses: food and beverages, housing, apparel, transportation, medical care, recreation, education and communication, and other goods and services). Pull out your debit card and credit card statements from a year ago and plug in your itemized spending into your spreadsheet.

Proceed by tallying up your costs across the BLS categories in the past month. Be sure to also account for any big-ticket costs you might pay less frequently, such as annual auto and home insurance premiums, by adding them up and dividing by 12 to get a monthly cost.

For an overall personal inflation rate, subtract your total monthly spending from a year ago from your current monthly spending. Then divide that sum by your monthly spending from a year ago.

For instance, if your spending last month was $4,500, and a year ago it was $4,250, the difference is $250. Divide $250 by $4,250 and you land at a personal inflation rate of 5.9%.

Ways to Minimize the Impact of Inflation

If these calculations are an eye opener, there are plenty of ways to manage your personal inflation rate.

  • Trim the nice-to-haves. “We all have 10% we can cut from our spending,” said Sorrow. For example, you gotta eat. While groceries are one thing, dining out or ordering in is another. Reining in your discretionary food costs might help you trim some spending.
  • Get a raise. If you haven’t already gotten a raise, now’s the time to put on your negotiating pants. Average wage growth hit its trough this past spring and now it’s rising. Alternatively, consider joining the Great Resignation. Data from the Atlanta Federal Reserve shows recent median wage growth for folks who switched jobs is 5.8%, compared to 4.7% for job-stayers
  • Delay Social Security. If you’re in your 60s, you likely have heard plenty about the payoff from delaying Social Security. Not only do you get a bigger benefit by waiting longer to claim benefits, you end up getting more dollars that get boosted each year by nnual cost of living adjustments.
  • Take care of your stuff (and yourself). “An ounce of prevention now can help you avoid more expensive problems later,” said Sorrow. Keep up with the maintenance on big-ticket items such as your car and HVAC. Same goes for medical checkups.
  • Plan ahead. Get ahead of future college bills for Junior by putting away money in a 529 plan, and taking advantage of compounding growth to beat tuition inflation.

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Matthew Etter profile photo
Matthew Etter, CFP®
Partner, President
Signet Financial Management
Daniel DiVizio profile photo
Daniel DiVizio, CFP®, CRC®
Financial Planning Director, Wealth Management
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