Government Inflation Rate Weighted over 50% on House and Car?

[Unionville]

I just saw this simplified version of how the government determines inflation rate - and over 50% applies to house and transportation.  My house is paid for and I don't own a car. Does that mean my personal inflation rate is a lot less?   When  I drilled down into the government official list - and again, I noticed about half the the things I don't normally buy.

I know they have to measure it in some way, it just makes me wonder how accurate it is.  For example, is it the price of things?  Or the sell-through of things (how many of those things actually get bought )?  And shouldn't it give extra weight to the things that most people buy (vs some people buy)? And then there's another variable -People might quickly change what they buy if an item increases in price.

[Villanelle]

Even though you have a paid off house, you still have some of the expenses included in that 42.4% circle.  It lists utilities, and "operations", which I'm guessing covers maintenance and property taxes, and perhaps also insurance. If much of the growth in that overall housing circle has come from maintenance (for example), your housing costs may have actually inflated more than some other people's have. 

everyone's personal inflation rate is going to be, well... personal.  If you are on a special diet and eat 10 eggs a day, your grocery bill has probably gone up significantly mroe than other people's.  So no matter how it is calculated, anyone can look at the formula and find things that don't apply to them, or categories on which they do spend that are under represented. 

Is your personal rate a lot less?  Maybe.  Or maybe the specific grocery items you buy (as one example) have gone up more than the overall grocery average. 

We discussed ad nauseam a while back whether changing your buying habits in response to inflation was actually "beating inflation" or not, and didn't really come to a consensus.  But I think many would agree that just because someone changes their habits--gives up those 10 eggs a day and buys avocados instead--that doesn't mean the general inflation rate should be calculated differently.   Yes, that person has found a way to lower the increase in their individual grocery bill, but they've given something up to do so and that doesn't change the fact that the price of eggs has skyrocketed. 

[poxpower]

Government doesn't report or measure inflation, they measure price changes.
Inflation is something they create by having bad bank legislation and increasing the money supply directly.

So to your question: There is no "personal rate of inflation". What you are asking is how much will future price changes affect you and there's no way to know that because legislation about housing ( such as property taxes ) can completely screw you over at random at any time.

Government might decide to massively hike property taxes and also increase taxes on home sales. That would then screw you way more then someone who's still renting. Alternatively they could keep giving homeowners tons of benefits and protections and cripple the real estate industry ( as they do now ) so that anyone trying to rent in your area has basically zero options and must rent somewhere else.

You just can't know.

[Ron Scott]

We discussed ad nauseam a while back whether changing your buying habits in response to inflation was actually "beating inflation" or not, and didn't really come to a consensus. 

These individuals are not “beating inflation”. Quite the opposite: They are reacting to inflation. They are explicitly acknowledging inflation and the impact it has on their spending power. They either choose to or or forced to change what they buy to maintain a level of spending that would otherwise grow faster than they want.

[Wolfpack Mustachian]

We discussed ad nauseam a while back whether changing your buying habits in response to inflation was actually "beating inflation" or not, and didn't really come to a consensus. 

These individuals are not “beating inflation”. Quite the opposite: They are reacting to inflation. They are explicitly acknowledging inflation and the impact it has on their spending power. They either choose to or or forced to change what they buy to maintain a level of spending that would otherwise grow faster than they want.

Or they are beating it by continuing to pay the lower interest rate payments on their locked in house payments or by letting it spur them into making cost changes that would only help like eating less meat or eating out less. Some of it is certainly reacting. Some is not as it involves no changes or net positive changes in their lives that reduce their costs.

[farmecologist]

We also have paid off house and vehicles.

I always tell folks to look at their personal rate of inflation, taking into consideration baskets of inflation that may not even affect you much.

As for us, our personal rate of inflation is much, MUCH less than advertised.   
 

[Villanelle]

We also have paid off house and vehicles.

I always tell folks to look at their personal rate of inflation, taking into consideration baskets of inflation that may not even affect you much.

As for us, our personal rate of inflation is much, MUCH less than advertised.   
 

I think the problem with this is that it's tough to predict how one's personal rate of inflation is going to differ from the average rate of inflation.  When the price of eggs went through the roof, that probably affected people who have paid-off homes and weren't buying cars more than it did the average person, because without those expenses, groceries make up a larger % of spending.  So as a % of total expenses skyrocketing egg prices affect a person whose biggest line item more--as a % of spending--than someone form whom groceries is much further down on their list. 

We never know what the next egg, or used car, or whatever, area of higher-than-average inflation is going to be, so there's really no way to know.  It seems to me that frugal people are no less likely to be affected by inflation, and in fact you could potentially argue that for someone with high but locked-in mortgage payments, they are less likely to see their expenses rise as much, since some of the are locked in.

For mustachians, it's great when the price of luxury handbags and new cars are what are pushing up inflation rates, since we are overall less likely to be consumers of Birkins and Teslas (er...).  but if it is the price of beans and bikes that has gone up 50%, that's more likely to affect us, as a %  increase, than the person who drops $15,000 on a handbag, so our inflation rates would be higher. 

Looked at another way, if the price of labor goes up, the person who spends on dealership oil changes sees a higher % increase.  If the price of oil goes up, the person who DIYs their oil changes sees a higher % increase.

Since there's no good way to predict what will happen going forward, there's nothing actionable (as far as reducing the % increase someone will see, compared to the % of average inflation).  So someone can look right now at what their personal inflation rates has been for the last year, but what good does that data really do them?  It doesn't predict what overall inflation rates will do next year, or even what their personal rate will do compared to the averages.

[blue_green_sparks]

 I track our monthly cash outflow against an expense estimation sheet and apply a 12-month moving average filter to smooth things out and get a look at our trajectory. Big ticket repairs and unexpected medical expenses skew things a lot so I would have to do more work to see if our nominal costs are changing. The Covid years skewed expenses to the low side, since we didn't get out much. We are currently spending 18% more, YOY. I think I'll do some work and see how that all breaks down, but I am fairly sure that inflation will only be a small part of that increase.

[GilesMM]

If the things you are buying this year vs last year are higher, that is your rate. Might be same as official, higher or lower.


We are stunned at grocery prices.   Many things look like they are up 20-30%.

[ChpBstrd]

I agree that one can insulate themselves from individual categories inflation - usually for a limited time - with things like mortgages, top quality durable merchandise, not owning a car, cooking one's own meals, etc. In theory, I own a nice set of kitchen knives that will last me the rest of my lifetime and so I'm immune to price increases for kitchen knives. Similarly, I own my home so I'm immune to rising housing costs (except for taxes, repairs, and insurance).

However, we're all one house fire away from having to replace everything we own at today's prices - or at best prices for used things which are depreciated from their new prices.

Also, it seems unlikely for prices of things in our personal basket to increase at a lower pace than things outside of our personal baskets forever. If the things we are buying are only inflating at 2% while the CPI is 5%, how long can that really continue?

E.g. if apples go up in price 10%, but we only eat oranges, we can expect a lot of product substitution as people make decisions to consume oranges instead of apples, and that demand shift will eventually increase our costs. Similarly, if prices for manufactured item X are going up rapidly, but we only consume manufactured item Y, then eventually the companies producing item Y will switch their production lines to item X and that reduction in supply for item Y will increase our costs.

Finally, there's a fallacy that pops up often on FIRE boards: One's expenses can increase at a given percentage regardless of how low those expenses are. E.g. the frugal person spending $30k/year probably has a personal inflation rate very similar to the drunken sailor spending $200k/year. It's just that the frugal person's nominal amount of price increases is much lower than the drunken sailor's. E.g. at 4% inflation, the frugal person spends $1,200 more than last year, and the drunken sailor spends $8,000 more. It would be a fallacy for the frugal person to say to the drunken sailor "My personal rate of inflation is lower than yours". No. It's just that the nominal cost of inflation was lower! Both experienced the same rate of inflation.

Regarding the difference between how CPI is calculated versus PCE, the Fed offers plenty of educational resources. These are just a couple:

Easy explanation: https://www.clevelandfed.org/publications/economic-trends/2014/et-20140417-pce-and-cpi-inflation-difference
Deep dive explanation: https://www.bls.gov/osmr/research-papers/2017/pdf/st170010.pdf

[Cranky]

I don’t eat out and I don’t buy plane tickets, so I don’t much care about the price of those things. “Core inflation” excludes groceries - because food prices are volatile - and I do care about the price of food.

How inflation affects you personally is going to vary. We recently downsized our housing, and I’m noticing the jump in the price of appliances.

[Cassie]

2 years ago when everything started to go up in price I either cut things out or found a cheaper substitute. I have a tiny mortgage and a paid off car. I reduced eating out from 1-2 times a week to monthly. I am finishing my bucket list travel by going to Europe last year, this year and my last trip booked for 2024.

[BicycleB]

For those not following @ChpBstrd's excellent but detailed links, the questions raised by OP and others are indeed addressed by the government's calculations of inflation, at least on some level.

Some details as I understand them (or misunderstand them - not an expert, but tried reading this stuff previously):

-US Government does try quite diligently to measure inflation. It publishes many details of its data and calculations, which afaik are world class.
-Yes, sometimes as prices change, people buy fewer expensive things, and sometimes substitute cheaper ones
-Economists too argue about whether that means people are living worse or better lives at a given income level
-Govt actually tries to measure this substitution effect. I think that for a while they calculated inflation with and without it, producing different inflation numbers with and without substitution. These different numbers can be tracked over time, or at least were tracked for a while.
-Govt calculates several other different inflation rates, such as with and without changes in price of food + gasoline, as well as as with and without substitution. They publish these and you can look them up.
-Yes the difference between renting, owning with mortgage and owning home free and clear are large. Govt's usual CPI statistic mostly uses rent to approximate comparable housing costs but your personal situation can surely be different.
-Fwiw, there are differences too between country and city living; govt calculates separate inflation for those. For example the "urban" Consumer Price Index is usually abbreviated "CPI-U" - look for it in news articles that contain details.
-If you dig into the statistics, you can roughly calculate the difference between your "personal" inflation rate and the govt's various versions of the inflation rate

Re the thread title, yes housing and car are about half, because that's how the average person spends. Your personal calculation (should you choose to calculate such a thing) will vary if you spend differently. Using any of several methods, you can still make a moderately useful "personal" calculation if you want.