Latest / Inflation Explained with Fexingo: CPI, Prices, and the Cost of Living for Everyday People / Why Your Own Inflation Rate Is Higher Than the CPI
Transcript
- Lucas: So the June CPI came in at 3.5 percent annualized, down from the prior month. That's the headline. But I want to talk about the number you don't see: your personal inflation rate. Luna: Your personal inflation rate? You mean the one that factors in your actual spending? Lucas: Exactly. The CPI is an average — it measures price changes for a hypothetical basket of goods and services that the Bureau of Labor Statistics updates every two years. But the problem is, that basket might not look anything like your basket. Luna: Right, because if you're a renter in a city where rents are up 8 percent, but the CPI shelter component is only up 5 percent, you're feeling more inflation than the headline says. Lucas: That's the core issue. The CPI shelter category, which is about a third of the overall index, uses something called Owners' Equivalent Rent — basically what homeowners would pay to rent their own homes. That measure tends to lag real market rents by about six to twelve months. So even if market rents stabilized last year, the CPI is still catching up. Luna: And that lag means the official number undershoots what renters are experiencing right now. Lucas: Right. But it's not just shelter. Look at car insurance. The CPI for motor vehicle insurance is up around 15 percent year over year. That's a huge weight if you own a car. But in the CPI basket, it's only about 2.5 percent of spending. So if your insurance premium jumped 20 percent, it barely moves the needle on the national average. Luna: So the official CPI smooths out the pain that's concentrated in certain categories. Lucas: And that creates a disconnect. The Fed targets 2 percent inflation based on the headline or core PCE, which is even more broad. But if your personal inflation rate is, say, 5 percent — because you spend proportionally more on rent, insurance, and maybe education — then the Fed's policy feels out of touch. Luna: So how does someone actually calculate their own inflation rate? Lucas: It's pretty straightforward. You take your major expense categories — housing, transportation, food, healthcare, insurance — and look up their year-over-year price changes from the BLS website. Then weight each category by what you actually spend as a percentage of your total budget. Add it up, and that's your personal CPI. Luna: You've done this for yourself? What did you find? Lucas: Yeah, I ran my own numbers last week. My personal inflation rate came out to about 4.8 percent. The official CPI was 3.5 percent. The gap came mostly from rent — I'm in a market where rents are still rising at 6 percent — and from car insurance, which went up 18 percent. Luna: That's a big difference. Over a year, that gap compounds into real purchasing power loss. Lucas: And that's why so many people feel like the economy is worse than the data suggests. It's not that the data is wrong — it's that the data is an average, and averages hide outliers. If you're in the top quartile of inflation experience, you're struggling. Luna: Speaking of data, I noticed wholesale prices actually fell 0.3 percent in June, driven by a big drop in gasoline. That should eventually feed through to consumer prices. Lucas: It should, but the pass-through isn't always immediate. Gasoline prices are already down at the pump — that's one category where the CPI actually captures it quickly. But for goods like packaged foods or household items, lower input costs take months to show up, if they ever do. Luna: And meanwhile, services inflation — things like rent, insurance, healthcare — tends to be stickier. Lucas: Exactly. That's why the core CPI, which excludes food and energy, barely moved. It's still hovering around 3.3 percent. The headline number dropped mainly because of energy. But the underlying trend is still above target. Luna: And that's where the 10-year breakeven inflation rate comes in — it's at 2.25 percent, which suggests bond markets think the Fed will get inflation down to around that level over the next decade. But that's an expectation, not a guarantee. Lucas: And it's interesting — gold has been falling. Gold is at about $4,065, down about 1 percent over the last five days. If investors really thought inflation was going to stay elevated, you'd expect gold to be holding up better. Luna: Maybe the market is buying the Fed's story that inflation is coming down. Or maybe it's just a rotation into other assets. Lucas: Look, the takeaway here isn't that the CPI is misleading — it's that you need to know your own numbers. If you're budgeting based on the headline inflation rate, you might be underestimating how much more you need to save or earn to maintain your living standard. Luna: Honestly, if this conversation helped you think about your own inflation rate, and it felt worth a coffee to you, that's the link — buy me a coffee dot com slash fexingo. We keep the show ad-free, and listener support is what makes that possible. Lucas: Yeah, it's a small way to say this kind of deep-dive economics is valuable. No pressure, but it does help. Luna: Alright, back to it. So Lucas, what's the simplest step someone can take today to calculate their personal inflation rate? Lucas: I'd say start with the BLS's CPI data tool. Download the latest release for each major category. Then list your top five spending categories and their approximate weights. Multiply each category's price change by its weight, sum them up, and you're done. Luna: And if that sounds like too much work? Lucas: There are online calculators that do it for you — some personal finance apps have a 'personal inflation rate' feature now. But the key is to use your actual spending, not the average. Luna: Because the average doesn't buy your groceries or pay your rent. Lucas: Exactly. And once you know your number, you can make better decisions about where to cut or what to demand from your employer in terms of raises. Luna: That's a good point. If you know you're experiencing 5 percent inflation, you need at least a 5 percent raise just to keep your purchasing power flat. Lucas: And that's before taxes. So if you're in a 25 percent tax bracket, you actually need a raise of about 6.7 percent to net 5 percent after tax. That's a tough conversation to have with a manager if you don't have the data. Luna: Alright, so the bottom line: the CPI is a useful benchmark, but it's not your reality. Do your own math. Lucas: And keep an eye on the categories that matter most to you. If shelter and insurance are your big ones, watch those numbers like a hawk. They're the ones that will tell you where your personal inflation is heading. Luna: Thanks, Lucas. That was really practical. Lucas: Thanks, Luna. Next time, we'll talk about how to hedge against your personal inflation rate — because there are actually a few ways to do it. Luna: Looking forward to it.