By Kyle Plotkin
Investment Advisor Representative
[email protected]
Inflation is one of those economic terms we hear so often that it almost seems to lose its meaning at times. Every month, we get a new number telling us how much prices have risen. But if you’ve ever looked at that number and thought, “That doesn’t sound like what I’m experiencing,” you may have a point.
The Consumer Price Index (CPI) measures price changes across a broad basket of goods and services, from groceries to gasoline to housing and medical care. Each category is weighted according to how much the “average” consumer spends on it. That makes CPI a useful way to measure inflation across the economy, but the key word here is average. And average isn’t always the most useful number…. As Peter says, you could put one foot in a bucket of boiling water and the other in a bucket of ice… and on average, you’d be comfortable.
Earlier this year, I shared a chart here showing how differently prices have behaved over the past 25 years. Hospital services, housing, and food had risen substantially, while items like televisions, clothing, and computer software had seen much smaller increases or even some price declines. The thing that caught my attention was how many of the fastest-rising expenses were necessities. You can put off replacing a television, but probably not groceries or a medical procedure. That’s why inflation can affect different individuals and families in different ways.
That difference can become particularly important in retirement. Consider two retirees living in the same town. One owns a home outright and drives relatively little. The other rents and travels frequently to visit family. Their spending patterns are already quite different, before we even consider healthcare costs. Prescription drugs, insurance premiums, property taxes, utilities, and travel expenses can all affect budgets in different ways. Even two households with similar incomes may experience very different changes in their cost of living.
There’s another thing too: the mix of expenses is different for every family, and the budget can look very different depending on circumstances. A family with a high income probably spends a considerably lower percentage of their income on necessities than a lower income family, so the same inflation number may feel very different.
None of this means that the headline inflation numbers are wrong. They are designed to measure averages, but like I mentioned above, averages are just that: averages. Who can even define what an average family or an average budget looks like? That depends on a million different factors. So the next time you hear that inflation is running at a particular rate, remember that it’s a useful statistic, but it may affect you much differently than it affects your neighbor.