There’s no two ways about it.
Prices are moving up.
For some things, by over 50% in the past year!
According to the US Bureau of Labor Statistics (BLS), the official score-keeper, May’s year-over-year change in the consumer price index (CPI) was 5.0%.
This is part of a rising trend of year-over-year numbers, from 1.4% in January, to 1.7% in February, to 2.6% in March, to 4.2% in April, to 5.0% in May.
Will June continue this trend? Will July? Will the rest of 2021?
What Does It Mean?
A handy website shows the history of monthly US inflation numbers from 1914 to 2021. Here’s what it shows for May’s year-on-year inflation numbers from 1914 to 2021:
According to the data, last time we saw a May year-over-year reading of 5% was 30 years ago, in 1991.
As you can see in the next figure, of calendar year average inflation rates, last time we had a calendar year with 5% inflation was 31 years ago, in 1990.
If 2021 ends with double-digit inflation, it’ll be higher than any calendar year in the last 40 years, all the way back to 1981!
Inflation can be (and has been in the past) really bad news for consumers. Looking at rolling 10-year historic inflation numbers, if in 1982 you tried buying something that cost $100 in 1972, you’d have needed $231!
When I was 23 years old in Israel, we suffered 33% inflation in a single month! Just try imagining going to the grocery store and paying $4 for something that was only $3 the previous month!
Thankfully, this is extremely unlikely to happen here in the US, but even at an annual 10% rate, inflation can be very unpleasant.
How Badly Will Inflation Hurt Your Personal Wallet?
If you simply look at the BLS CPI number, it looks alarming. But will it be that bad for you personally?
The BLS website lets you drill down to major categories. These currently show the following:
- Shelter: 2.2%
- Energy commodities: 54.5%
- Energy services: 6.2%
- Food at home: 0.7%
- Food away from home: 4.0%
- New vehicles: 3.3%
- Used vehicles: 29.7%
- Transportation services: 11.2%
- Apparel: 4.6%
- Medical care commodities: -1.9%
- Medical care services: 1.5%
- Alcoholic beverages: 1.6%
- Tobacco and smoking products: 7.3%
As you can see, energy commodities (think gas for your car, electricity, natural gas, fuel oil) increased an incredible 54.5% over the past 12 months.
On the other hand, medical care commodities (think prescription medicine) dropped by 1.9%.
Food away from home ran up 4%, nearly 6 times faster than food at home’s 0.7%.
The one number that puzzles me is the 2.2% for shelter. From what I’m reading, real estate prices have been going up, more than 10% in the past year. Perhaps the cost of buying a home is a small fraction of the BLS shelter number, since most of us don’t buy a home more than once a decade or so.
With this breakdown and your own spending numbers from the past year, you can calculate your personal rate of inflation. The following table shows an example for a family of non-smokers who bought their home with a fixed-rate mortgage, and who aren’t planning to buy a car anytime soon.
The “CPI” column shows the current reading of the CPI according to the BLS website for each category (adding a “fixed” category for things that don’t go up, such as fixed-rate mortgage payments, level-term life insurance premiums, etc.).
In the next column, you can see a hypothetical family’s budget broken down by those categories.
In the final column, you multiply the CPI increase by your spending fractions to get the contribution of each category to your personal inflation rate.
Then, simply sum the numbers in that last column to find your overall personal inflation rate. For this specific family, inflation is running at 2.2%, less than half the official CPI.
Is Inflation Really That Low for Everyone?
Of course not.
The overall CPI is based on a pre-defined basket of goods and services, weighted by how the budget of the “average American family” breaks down.
Your own rate may be lower, like the above example, or it might be higher.
Imagine if you need to buy a used car tomorrow, or if you’re a traveling salesman driving from town to town every day. If that’s you, your inflation rate will skew much higher due to the 29.7% rate for used vehicles and/or 54.5% for energy commodities. Or you might be renting and your landlord is just waiting for your lease to renew so he can hike your rent, making your “fixed” category much smaller.
The Bottom Line
Inflation in general isn’t good for consumers, and is especially bad for people living on fixed income.
However, it can be very good for borrowers with fixed-interest loans (like most mortgages). If cost-of-living adjustments (COLAs) push your income up while your mortgage payments stay the same, those mortgage payments become easier over time.
The above shows you how to figure out your personal inflation rate. Then, compare that to any COLAs (or other raises) you may get. If the latter is higher than the former, you’re in luck. If the opposite is true, you’ll need to find ways to make more money, trim your spending, or both.
This article is intended for informational purposes only, and should not be considered financial or legal advice. You should consult a relevant professional before making any major decisions.