Personal inflation vs. reported inflation

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peteyperson
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Personal inflation vs. reported inflation

Post by peteyperson »

Does anyone here believe in the idea of a personal inflation (on your own yearly spending increases) and using that for investing calculations vs. using a government measurement like the CPI?

I remember Dominguez's ignorance of inflation in the book 'Your Money or Your Life' and thought that was foolish. I'm not sure I completely buy into the idea of personal inflation as a reliable tool for investment return analysis.

If you could exclude the problem with health insurance increases from your answer, that would be helpful..

Petey
Cut-Throat
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Post by Cut-Throat »

Yes, I thought about this myself. Unfortuately it seems that the stuff that you have to buy every year to survive is the stuff that inflation affects the most.

Examples are Home heating costs, electricity and food. The stuff that is cheaper are things like color TVs - but I have not bought one in 10 years (they are so reliable!). Inflation may affect us more than the 'official' number. :cry:
MaiPenRai
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Post by MaiPenRai »

I suspect that for many in my age group two of the larger areas of our spending pie are relatively immune from a CPI:

mortgage payment (- tax/ins)
student loans

The payments get smaller relative to income over time, wage stagnation of late aside.
therealchips
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To avoid detailed calculations, I estimate inflation at 3%.

Post by therealchips »

Inflation is far more important in my planning than income taxes. For one thing, inflation reaches my IRA while income tax does not. I estimate the allocation of my income (broadly construed) over the next thirty years at about 45% for living expenses and 45% for repairing the damage that inflation does to the purchasing power of the retirement stash. That leaves about 10% for personal income taxes. (Taxes are that low because my IRA is a large part of my retirement fund and I plan to make only the minimum required withdrawals.)

Don't let anyone tell you that you won't be saving for retirement after you enter retirement. Your withdrawals are likely to be less than total income in various years, especially years when your investment assets increase sharply. In "total income" I count both taxable cash income and unrealized net capital gains, as well as gains inside tax deferred accounts. Spending less than your total income looks to me like "saving". Using this broad definition of income, I have saved an average of half of my income during ten years of retirement. It would be even higher if I quit pretending that my house purchase was just another consumer expenditure, with no residual value.

There is a detailed example of adjusting inflation rates for personal spending patterns at http://www.bls.gov/cpi/cpifact5.htm
The Consumer Price Index -- Why the Published Averages Don't Always Match An Individual's Inflation Experience.

The Consumer Price Index (CPI) is a measure of the average change in prices paid by urban consumers for a market basket of goods and services. Because the CPI is a statistical average, it may not reflect your experience or that of specific families or individuals, particularly those whose expenditure patterns differ substantially from the "average" urban consumer. . . . The CPI divides the consumer market basket into eight major groups of goods and services. You can estimate the approximate difference in your expenditure pattern by estimating your relative expenditures for major groups of consumer goods and services. You could then compare them to the CPI groups' relative importance data, which are approximately the weights used in CPI estimation.


http://www.econedlink.org/lessons/index ... sson=EM339 has this:

A Market Basket of Goods and Services

The Consumer Price Index measures prices of goods and services in a market basket of goods and services that is intended to be representative of a typical consumer's purchases. The percentages that are currently used to describe the categories of goods and services that market basket are as follows.

Market Basket of Goods
Food and beverages 16 %
Recreation 6 %
Housing 41 %
Education 3 %
Clothing 4 %
Communication 3 %
Transportation 17 %
Other goods and services 4 %
Medical care 6 %


It's tough to estimate those allocations for myself. Probably my housing and clothing costs will be about half as big in my experience as in this table. My house is unmortgaged, not my largest asset, and I don't plan to buy another one. My education expense is zero. Medical care is hard to predict. I will be eligible for Medicare soon, with results I can't yet determine. It seems likely that going on Medicare will reduce my expenses since I am now paying large insurance premiums. We'll see. Transportation is another difficult area: my transportation expenses would soar about once a decade if, as I plan, I buy a new car for cash. Maybe I could pretend that I'm buying the car with a ten-year loan. Just now, I'm driving a '93 and stalling on buying a new car because of the market's performance in recent years. I couldn't ask for better service than I got from the old car on the trip to Yellowstone last May -- 750 miles each way.

To estimate your personal inflation rate, you also need to know the inflation rate for each of those eight areas, as modified for your personal case. http://ncb.intnet.mu/cso/cpisept.htm gives the data at one point in time. I haven't (yet) found a source for the history of inflation in these eight general areas.
He who has lived obscurely and quietly has lived well. [Latin: Bene qui latuit, bene vixit.]

Chips
Mike
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Personal Inflation Rate

Post by Mike »

It seems to me that to calculate your personal inflation rate all you have to do is write down what you spend in a year, then compare it with what you spent in past years. You can break it down by categories to see if your housing, food, or such is going up much faster than the other categories. You could amortize major purchases like cars over several years. Estimating future inflation would be pure guess work, whether using your own numbers or the government ones. However, using your own numbers could help you to spot trends, and what areas may need rethinking.
Trex
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Post by Trex »

Hi MaiPenRai,

Off topic a bit, but wanted to comment on student loans. You have probably already done this, but I didn't think about it until it was too late. My wife's students loans (paid off now) were at 18%. One could easily transfer that to a low fixed rate CC and save some money. Once again, you probably already thought about this, but it escaped me back then.

Trex
wanderer
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Post by wanderer »

... or take out a lower HE loan and make the interest pmts deductible. Couple of limitations but few hit them...
regards,

wanderer

The field has eyes / the wood has ears / I will see / be silent and hear
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