I’ve been reading a lot about inflation lately and the potential impact it can have on households. I’ve also received questions from clients about inflation projections going forward. Some of the current thoughts around this issue relate to a “personal inflation rate.” In other words: How does the current inflationary environment affect individuals?
This makes sense to me, as everyone spends their money differently. Budgets tend to be more impacted in the areas where you absolutely need to spend money, or the non-discretionary part of your budget. Of course, if the high levels of inflation continue, the potential for inflation to impact the discretionary part of your budget may also become an issue.Breaking it down, non-discretionary expenses are things like mortgage or rent payments, insurance premiums, car payments, food, energy usage, water, school tuition, etc. Discretionary expenses potentially include personal travel, dining out, club dues, alcohol consumption, new cars, new homes, etc. – all things that consumers can adjust their spending habits on to account for the sensitivity of their household budget to inflation.Subscribe to Kiplinger’s Personal Finance
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Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail. Profit and prosper with the best of expert advice - straight to your e-mail.My ‘Personal Inflation Calculator’
In the interest of trying to work through this on my own, and to provide guidance to our clients who are concerned about the impact of inflation on their own planning, I created a “Personal Inflation Calculator” using the latest numbers from the . If you’ve never looked at the monthly reports from the BLS, they are quite extensive, and cover quite a few common budget items. They are also broken down into “seasonally adjusted” and “unadjusted” inflation rates for each item.A Test Case
I approached my test analysis assuming that we would start with budget estimates for the 2021 calendar year and attempt to predict how a typical household budget would be affected in 2022. Some interesting observations came to light.In case No. 1, I considered a family of four with two young children and an annual household budget of $108,400. This includes such things as (in 2021 annual amounts):- Mortgage: $18,000
- Auto loans: $7,200
- Credit card payments: $2,000
- Property tax: $4,000
- Groceries: $10,000
- Gasoline: $3,600
- Natural gas: $1,200
- Electricity: $1,800
- Airfares: $3,000
- Lodging away from home: $1,500
- Dining out: $6,000
- Pet food: $1,200
- Veterinary costs: $600
- Wireless telephone services: $1,400
- Cable TV: $1,800
Your Own Inflation Rate Will Differ
When figuring your own personal inflation rate, you should realize that some budget items are not going to increase for the foreseeable future, such as fixed debt payments (home mortgage, auto loan, etc.). However, credit card interest rates are certainly going to increase – along with the general rise in interest rates related to inflation, as are many other things, such as food, travel, gasoline and utilities.
And the costs of some of the budget items are actually expected to decrease, such as “Food at Elementary and Secondary Schools” and “Computers, Software, and Smartphones.”The biggest increases (unadjusted) are in the following areas:- Home prices: +20%
- Rent: +5.2%
- New car prices: +12.6%
- Used car prices: +16.10%
- Gasoline: +48.70%
- Fuel oil: +106.7%
- Electricity: +12%
- Natural gas: +30.2%
- Airfares: +37.8%
- Lodging away from home: +19.3%
- Dining out: +9%
- Food / groceries: +11.9%
- And, the perennial favorite, health insurance: +13.8%
Some Quick Takeaways:
- Depending on the sensitivity of your budget to items that are showing higher inflation rates, you may want to consider delaying purchase of those items, assuming they are discretionary in nature, such as homes, cars and increased travel.
- Take steps to pay off adjustable-rate debt, such as credit cards.
- Consider making your home more energy efficient (although this may expose you to higher inflationary costs from remodelers), and if you start to see higher utility bills, think about shopping energy providers.
- Renting vs. buying a home is a tricky challenge right now, because even as rents increase, mortgage rates and home prices are rising as well. However, considering that the projected rise in rents is +5.2% and the year-over-year increase in the price of homes nationwide was +20% in February, possibly delay buying a home until home prices fall to a more reasonable level.
- If you have an adjustable-rate mortgage, meet with your adviser to determine whether this should be refinanced to a fixed rate.
- Possibly delay purchasing a vacation or second home until this situation resolves itself.
- The cost of groceries is rising at a slightly higher rate than the costs of dining out. This may give you pause when thinking about cooking all of your meals at home. However, maybe consider cutting back on the more expensive menu items, as well as high-cost beverages.
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