How to calculate my household's inflation rate?

[APowers]

We often assume that inflation averages a given rate annually (4% is the rate I think I've seen most often). That rate of inflation is based on the CPI, right? The CPI is based on a set proportion of eight categories (and their sub-categories):

    FOOD AND BEVERAGES (breakfast cereal, milk, coffee, chicken, wine, full service meals, snacks)
    HOUSING (rent of primary residence, owners' equivalent rent, fuel oil, bedroom furniture)
    APPAREL (men's shirts and sweaters, women's dresses, jewelry)
    TRANSPORTATION (new vehicles, airline fares, gasoline, motor vehicle insurance)
    MEDICAL CARE (prescription drugs and medical supplies, physicians' services, eyeglasses and eye care, hospital services)
    RECREATION (televisions, toys, pets and pet products, sports equipment, admissions);
    EDUCATION AND COMMUNICATION (college tuition, postage, telephone services, computer software and accessories);
    OTHER GOODS AND SERVICES (tobacco and smoking products, haircuts and other personal services, funeral expenses).

Here's my question: The CPI is an average, which is great. But on an individual level, given my particular life/financial circumstances, I don't participate in a goodly portion of those categories, or significant portions of their sub-categories. Should I really still be assuming a 4% average rate of inflation? That seems wrong to me.

For examples,

We don't eat out or drink alcohol, but that's 5% of the CPI basket in the FOOD category.
We own our home outright, so we don't pay rent or mortgage or OER, but that's 24% of the CPI in the HOUSING category.
We don't buy new vehicles or lease them, but that's almost 4% in the TRANS category.
We don't have pets or watch TV, but that's 2.5% of the CPI in the RECREATION category.
Etc., etc., etc.


If I calculated the inflation rate based on the things we actually spend money on, I would guess it to be a lot closer to zero than to 4%. Is there any way to calculate this, short of tediously hand-comparing ALL the tiny numbers in the BLS spreadsheets?

[matchewed]

Yeah there is an easier way. Start tracking the price you pay for items. Compare this over time. Now you have your personal inflation rate.

[Bob W]

The CPI is the "consumer price index" and just one of many government metrics for measuring prices.  You may have heard of the  PPI as well but there are many others.

The CPI is manipulated by the government to keep it artificially low because what it pays out to the population is based on it.   They accomplish this by continually modifying the basket of goods and making assumptions like --- if beef prices go up then consumers switch to beans and therefore lets skew our numbers to beans.   (remember this is the same Government that was adamant they never spied on anyone other than terrorist until Snowden shinned the light).

If you are interested in what the real inflation rate is google real inflation for some differing takes on this.

Inflation is actually a tax -- as articulated by Ben Bernake and Ronald Regan. 

So when you apply whatever number you choose (I assure you with the amount of new money printed it is well above 6%)  you must apply it to all your assets to come up with your real tax.   

So let's say that your home and invested assets are $1,500,000 and you chose 4% as  your rate of inflation.   You then know that your inflation tax is $60,000 per year.   You many not be too concerned about this as you perceive that your home or investments will generally go up each year.   But remember this isn't an earnings tax.    So if,  as often happens,  your investments go down 30% in a year,  your inflation tax continues on it's merry way.   So you could potentially lose 500K in investment value while at the same time pay 60K in inflation tax. 

MMM often states that he thinks his taxes are about right.   Problem is when you factor in the inflation tax he actually pays over 100% in taxes per year based on income.

Most people have a hard time wrapping their heads around inflation as a tax.   The fact that the Chairman of the fed said it was a tax should be very clear.   

At it's basic level a tax is the transfer of wealth from an entity to the Government.  The Government accomplishes this by printing money and devaluing your dollar denominated assets.   

It would be easy enough for the Government to do away completely with taxes at all levels and simply print 5 Trillion in new money each year. (notice I didn't say borrow)  There would be many benefits to that IMHO. 

For your household and what you spend,  it probably isn't worth the 10 minutes it took me to write this to think about.   There is very little, if anything you can do about it.   Not spending and investing in things that go up more than inflation (not houses) seems like a pretty good thing.   

 The best hedge appears to be collectible stamps and numismatic coins.    Stamps have gone up 10% per year pretty much without regard to the economy and no significant downturns for over 80 years.   They don't pay dividends and can be held how ever you like to hold them.   

I'm probably wrong about a lot of this but not interested into getting into the "inflation is not a tax" debate again that some foolishly try to argue.   

[arebelspy]

The CPI is manipulated by the government to keep it artificially low because what it pays out to the population is based on it.

I don't care if you want to argue if inflation is a tax or not, but tin-foil hat conspiracy theories like this?  You're better than that.  :)

[Zikoris]

I just track what we spend and compare year over year. We've held steady on groceries for the last three years, and rent has increased slightly, but overall we trend downwards over time. So negative inflation. Yay!

[Bob W]

The CPI is manipulated by the government to keep it artificially low because what it pays out to the population is based on it.

I don't care if you want to argue if inflation is a tax or not, but tin-foil hat conspiracy theories like this?  You're better than that.  :)

.          I guess I'm way better than that given that I typed that entry off the top of my tin foil covered hat and it happens to be almost plagerism of this Forbes article.
If You Want To Know The Real Rate Of Inflation, Don't Bother With The CPI

Common sense tells us the Consumer Price Index is not an adequate measure of inflation. For the second year in a row the Consumer Price Index for All Urban Consumers (CPI-U) remained under 2 percent.  On average, consumer prices increased 1.5 percent, according to the government. However, the government has incentives to keep this statistic as low as possible. In fact, the CPI doesn’t even measure inflation, rather a range of consumer spending behaviors. The CPI is perhaps one of the most important government statistics because it affects a number of public programs and is used as a benchmark to set public policy. But it’s accuracy is questionable, especially when compared with other agency’s inflation measures.

Why does the government want low inflation numbers?

The CPI is tied to the incomes of about 80 million Americans, specifically: Social Security beneficiaries, food stamp recipients, military and federal Civil Service retirees and survivors, and children on school lunch programs. The higher the CPI, the more money the government needs to spend on these income payments to keep pace with the cost of living. However, this same government is about $17 trillion in debt. If the CPI is low, the less money the government needs to spend on cost of living adjustments, something seniors are astutely aware of.

The government has a few resources at its disposal to manipulate the CPI. First, the Bureau of Labor Statistics operates under a veil of secrecy. The raw data used to calculate the CPI is not available to the public. When I asked why, I was told  “so  companies can’t compare prices.” This makes very little sense because companies can easily compare prices with data openly available on the internet. It also makes it impossible to audit their findings. Additionally, over the past 30 years, the government has changed the way it calculates inflation more than 20 times. These ‘methodological improvements’ to the CPI are said to give a more accurate measure of consumer prices. However, these changes could also be a convenient way to include or exclude certain products that give favorably low results, but there’s no way to know, given the lack of transparency.   http://www.forbes.com/sites/perianneboring/2014/02/03/if-you-want-to-know-the-real-rate-of-inflation-dont-bother-with-the-cpi/              bottom line> the government reported CPI inflation number has only a small basis in reality.    I'm   I00% sure the government doesn't have 25,000 NSA workers spying on us all,  because that's what the agency director said.     Whatever number you pick or whether ones sees it as a tax or not is a pretty moot point.  The point is that it is relentless and damn hard to work around. 

[arebelspy]

Apply your signature to what would happen over time if this was true. You understand compounding.

[APowers]

If our actual spending categories don't inflate at the same rate as the CPI, should we really be assuming that rate of inflation for investment/safe withdrawal purposes? I guess this is my real question behind the question.

[arebelspy]

If our actual spending categories don't inflate at the same rate as the CPI, should we really be assuming that rate of inflation for investment/safe withdrawal purposes? I guess this is my real question behind the question.

Many of us don't bother under the idea that you are measuring with a micrometer, but cutting with an axe, but yes, some of the more pedantic among us will measure their own personal inflation rate.  It is much more relevant than CPI, of course.

Others have a spreadsheet of spending over the next X years (30, 60, whatever) with breakdowns of when they'll need to replace what (fridge, car, roof, clothes, etc) and what they estimate it will cost at that time, giving each individual item its own inflation rate based on projections.

Of course, you're left with loads of assumptions and end up hacking away with that axe.  Which is why most of us just plan for rough inflation numbers on everything and roll with being flexible.  :)