Calculating Inflation


D

Danl

First of all, I have been reading this group for a while now and I
appreciate the participation of the posters. There is always more than 1 way
to look at things and you folks seem to cover a lot of POVs.

Proper financial planning (almost) always requires one to calculate the
effect of inflation in the years to come. However, I believe that *my*
inflation is not necessarily equal to my neighbor's inflation or certainly
not the inflation of my cousin in Minot, North Dakota. We have different
lifestyles and different assets. I belive that the generally quoted CPI is
calculated using a fixed basket of goods and services. That basket may not
(and probably doesn't) match very closely with my consumption of goods and
services. Have any of you attempted to calculate *your* inflation given a
personalized basket of goods and services? If so, please share your
thoughts.

Danl
 
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A

Andy

Danl said:
I belive that the generally quoted CPI is
calculated using a fixed basket of goods and services. That basket may not
(and probably doesn't) match very closely with my consumption of goods and
services. Have any of you attempted to calculate *your* inflation given a
personalized basket of goods and services? If so, please share your
thoughts.
No I have not yet calculated my personal rate of inflation, but I have
been throwing all my receipts in a shoebox for a while now in the hopes
of one day having the time to do some calculations just for fun
(primarily to verify that the CPI bears no relation to my personal
inflation experience).

However, even when I do calculate my personal inflation index it really
won't mean much in terms of predicting the future or financial
planning. While the CPI or any other inflation index is useful to the
extent it makes you realize that some, but not all, things will be more
expensive in the future, I think there is not much value in doing
financial planning based on estimates of future inflation. Every type
of good and service changes price at different rates, and those rates
will undoubtedly change in the future. Also, people adjust their
consumption based on changes in relative prices, so the fact that the
bundle of goods and services you buy today may cost X percent more 20
years from now is pretty much irrelevant; The one thing you can be sure
of is that you will be buying a substantially different bundle of goods
and services in 20 years.

Andy
 
E

Elle

Danl said:
I belive that the generally quoted CPI is calculated using
a fixed basket of goods and services. That basket may not
(and probably doesn't) match very closely with my
consumption of goods and services. Have any of you
attempted to calculate *your* inflation given a
personalized basket of goods and services?
I agree with your concerns about the CPI. One problem with
is that it has a rent component, and that can be large. By
contrast, many folks own their houses outright or have a
fixed rate mortgage.

CPI might be personally useful in the sense that it's one of
many gages that can be used to estimate the effects of
inflation on, say, corporate costs and so to some extent
stock prices. One can google and get to the government site
that discusses CPI and find it broken down into components.
But that's work that I don't think will yield much fruit
except, again, for stock research.

I started putting all my expenses on a spreadsheet a few
years ago, broken down by bill categories (e.g. electric,
gas, water, property insurance, trash removal, auto
insurance, credit card miscellaneous food recreation auto
repairs yada, cash miscellaneous food recreation auto
repairs yada). Among other things, this permits me to see
(1) what category is the largest part of my yearly expenses;
and (2) what's increasing. So if gas and electric is a large
part of my expenses, and gas and electric costs scream
upwards, then my personal rate of inflation may tend to be
higher than the national CPI.

At the moment, the figure on which I focus most is overall
monthly expense average. If the average over a year has gone
up, then I try to figure out why and whether I want to do
anything about it. If my income is keeping up with the rise,
then I don't really care. It does keep me mindful that my
expenses are going to go up (even if I stay young and
healthy forever) and so aware that I need to invest with an
eye towards assets and securities that hedge inflation.
Preferably by a lot.
 
M

Mechanics of Money Financial BBS

The prior posts are well put. I would add that you (and all of us) are
in fact tied to the overall economy more than you think. Your
investments are held at investment companies, and you are dependent
upon companies to supply goods and services to you (both foreign and
domestic) -- unless you live in an isloated community in the mountains
that has no contact with the outside world (I say that not in jest, I
actually do live near such a community). So while your personal CPI
might be plus or minus one or more percentage points, that really
doesn't change the fact that you and your spending will be for
goods/services that are impacted by inflation -- the exact figure which
will be somewhat close to the aggregate number. Thus, planning using
the aggregate is much better than using nothing. Furthermore,
calculating your personal CPI would prove ineffective as your own
spending habbits would change over time as well (I didn't buy the same
things that I did last year, in the prior year and they cost different
amounts each year). It is an interesting idea though.


Gary Brolis
http://www.MechanicsofMoney.com
http://www.MechanicsofMoney.com/blog.php
 
T

timbo

Danl said:
Have any of you attempted to calculate *your* inflation given a
personalized basket of goods and services? If so, please share your
thoughts.
Your dollar erosion is proportional to localized inflation -- not
aggregate form. If your income doesn't compensate, you'll lose in the
long run -- hence, forced to strolling up/down the hallways with your
new friend Butch at the nearest low-cost [nursing home] provider.

The ultimate goal is to have enough at retirement to live like you
wanted to at age twenty. Hopefully, globalization [sic] will make
inflation moot.
 
D

dapperdobbs

I look at big ticket items like home prices, autos, health care,
college expenses, anticipated taxes, and so forth, then try to
anticipate my participation. CPI numbers are extremely useful in
anticipating non-granular expenses, and in anticipating interest rates.
 
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C

Charlie

The ideas and approaches to viewing the effects of inflation that I read
here are fascinating. My take has been to view the past and future base
level of the economy as a guide to what my needs in money will be or
were. The calculation I use works quite well. The mathematicians I
have known prefer other formulas, but the end result is very similar.
From the end of WW-2 to the early 1990's, and probably now even though
it is lost in the immediate swirl of current events, a dollar's buying
power has fallen by half every fourteen years. To do this arithmetic
requires either some real math ability or a cheap scientific calculator.

Start with "Old dollar times two". Use the "Y to the Nth" key to
enter an exponent for the 'two'. The exponent is the number of years in
question divided by fourteen. Then hit "equals" to get the "new
dollars." The calculator swallows decimals just fine. If the exponent
value is positive the calculation goes forward. Make it negative to
look back. With known prices or dollar levels current and past looking
back can be used to validate or qualify results.

My calculations and real life experience are that the results are not
for the faint of heart. Sorry, I cannot be reached directly.
 
D

dapperdobbs

Charlie - Thanks for the ballpark numbers. That's useful. Depressing,
but useful.
 
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