How is inflation calculated?
You’ve seen it in the store and heard about it on the news, inflation is the highest it’s been in 40 years. Inflation has been called “the worst tax,” since it impacts everyone and pervades the economy. Inflation is calculated based on price changes for a “basket” of goods and services. This basket does not contain every good and service but represents typical types and quantities of products consumed by households. Of course, no one is “average,” and inflation impacts each of us a bit different. In the United States, the inflation rate is calculated by statisticians at the Bureau of Labor Statistics and Bureau of Economic Analysis.
Understanding your personal inflation rate
Your personal inflation rate depends on what you spend your money on and how much you spend in different categories. For example, if you have a long commute to work, the increase in gas prices can cause a personal inflation rate to increase substantially. All of us spend money on food and energy each year, but those that bought a used car recently were probably surprised by the price.
Below is a summary of the 2021 price increases for different categories of goods and services. Overall, prices increased 7.0% in 2021. Notable subcategories include
used car and truck prices increasing 37.3% and gasoline prices increasing 49.3%. Many economists follow the “core” rate of inflation that strips out the more volatile food and energy components. For 2021, the core rate was 5.5%, though that has climbed to 6.4% over the twelve months through February.
Category 2021 % change
Other commodities 10.7%
Medical care services 2.5%
Transportation services 4.2%
Consider a monthly household budget of $3,000 at the beginning of 2021, made up of $1,500 for rent, $400 for energy, $600 for food and $500 for medical care.
Keeping the same quantities and assuming the inflation rates in the table above, the cost would have increased to $1,561.50 for rent, $517.20 for energy,
$637.80 for food and $512.50 for medical care. The total monthly budget would now need to be $3,229, a 7.6% increase.
How to cope with rising inflation
Avoiding the impact of inflation entirely is not possible, but there are practices you can undertake to help protect your wealth. Your investment strategy should be
attuned to the current environment of higher inflation. Since we haven’t seen inflation this high in about 40 years, many investment managers have not
invested through this sort of environment. Rising interest rates and expensive asset prices need an asset allocation that adapts to today’s specific challenges. Real estate provided returns of nearly 40% in 2021, while gold, historically heralded as an inflation-protected asset, lost over 3% in 2021. Vintage has been around since 1985, and Chief Investment Officer Frank Moore keenly recalls living through the last inflationary period.
We’re hoping to see some disinflation in the coming months with the Federal Reserve taking action. Disinflation means that prices are still rising but at a decreasing rate, going from 7% hopefully toward a more reasonable 3 – 4% per year.