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What’s a Personal Inflation Rate, and Why Does It Matter?

Calculating your personal inflation rate can help you build better spending, saving and investing strategies.

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Inflation is continuing to be a problem for U.S. consumers. Even though the rate has fallen from its 40-year high of 9.1% in June 2022, many people are still concerned about the impact of inflation on their lives.

But, as with all things, general trends can have very different effects on individuals, depending on your goals, lifestyle and more.

That’s why it’s useful to understand and calculate your own personal inflation rate—exactly how much inflation is costing you and your family. Once you have this information, you can be more thoughtful about your spending, saving and investing while prices remain elevated, and beyond.

What’s a Personal Inflation Rate?

The CPI, or the consumer price index, is how the government measures the overall change in prices over time based on a basket of both goods and services. It’s the most widely used measure of inflation and it’s the one you hear reported in the news.

But while general trends capture headlines, financial planning is about more than trends and headlines. It’s about the specific effects that trends have on each person’s individual situation and goals. Your personal inflation rate is how much rising prices are actually impacting you and your lifestyle based on your spending and your purchases year to year.

You might find that your personal inflation rate is lower than the national number based on your usual spending and whether you’ve made any lifestyle adjustments to help counter rising costs. Or you may find that your personal inflation rate is higher, and that may prompt you to take a closer look at your overall spending and then brainstorm how to save.

Calculating Your Personal Inflation Rate

The best way to calculate your personal inflation rate is to compare your specific budget items—gas, rent, groceries—from one year to the next.

For example, if in February 2022, you spent $800 on groceries, and in February 2023, you spent $1,200 on groceries, to get your personal inflation rate when it comes to grocery spending, do the following calculation:

  • February 2023 grocery spending – February 2022 grocery spending / February 2022 spending.

  • Then, multiply the answer of the above calculation by 100.

(Feb. 2023 groceries - Feb. 2022 groceries) ÷ Feb. 2022 groceries × 100

Using the above numbers ($1,200 and $800), your personal inflation rate for grocery spending is 50%. You can do the same for other spending categories, such as housing, transportation, utilities, education, clothing, health care, recreation and giving.

How Can I Use My Personal Inflation Rate?

Once you’ve calculated your personal inflation rate across all your spending categories, you can use the rates to develop your budgeting and financial and investment planning strategies to help you cope with rising prices.

When budgeting

On the budget side, with the above grocery spending example, 50% is an especially large personal inflation rate. Think about what changes you might be able to make, even if they’re temporary, to help bring your grocery spending down. Perhaps you buy some groceries in bulk at a big box store, maybe you shop for more seasonal fruits and veggies at local farmers markets where produce doesn’t have to travel as far, or you could even choose to pass on some splurge food and drink items until prices calm down.

When investing

On the investing side, you can also use your personal inflation rate to set a target return rate that can help you stay ahead of your needs. Use our handy calculator to compute the future value of an investment, based on a rate of return, to help you translate percentages back to dollars: Future Value of Investment Calculator

The amount you’re aiming to earn through investing needs to be realistic, though, and it must align with your risk comfort level. For example, if your investment rate of return target comes back at 20%, and your risk tolerance is especially low, it’s probably a good idea to take a harder look on the spending side and determine where you can cut back.

How does inflation shrink your nest egg? Get inflation tips and strategies.

Knowing Your Rate Can Help You Prepare

As you take a look at your finances, know that you’re not alone—for many people, sky-high inflation rates seen in the news can be daunting. But often, some of your fears can be at least somewhat alleviated when you drill down into your actual, personal spending and you calculate your personal inflation rate across a variety of spending categories.

In the face of high or rising inflation, it’s always better to be prepared with as much information as possible. That way you can make the most informed financial decisions for yourself and your loved ones.

Need help with your financial planning needs?

Talk to an experience financial consultant.

Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.

This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.