Over the last couple of years you might have heard that inflation has remained relatively low. In general, it is assumed that over the long run inflation, or the rise in prices of products and services, will average 3%. However, the inflation statistic that you constantly hear being quoted all over the place tracks the inflation only on a very particular group of goods and services. Why is this important?
Your Personal Inflation Rate Isn’t The Same Thing
While many people assume that inflation is the same everywhere within a country, that couldn’t be further from the truth. There are many factors that determine what your personal inflation rate is versus the national inflation rate quoted in the news.
The first factor that comes to mind is what region of the country you live in. Prices vary greatly across any country based on where you live. In one area of the country, housing might be increasing in cost and your utility bills might be decreasing in costs. However, in another area of the country the exact opposite could be true with housing getting cheaper and utilities getting more expensive.
The next factor to consider is the basket of goods and services your household buys. Each household spends their money in their own unique way. One household may spend a large portion of their grocery budget on meats while another spends the majority of their grocery budget on vegetables. If meat spikes one year and vegetables become really cheap, the two household could have very different inflation rates.
The last factor I’ll present today is substitution. Some households may be very price sensitive and as soon as the price goes up on one good, they’ll substitute it for a cheaper good that serves the same purpose. For instance, if meat went up in price and vegetables prices stayed the same, one household might quit buying the more expensive meat and instead buy vegetables while the other household continues to buy the more expensive meat. After all, they’re both food products.
The Quoted Inflation Rate Is What Many Major Decisions Are Based On
There are many decisions and items that are based on the national inflation rate. There are contracts in businesses tied to the national inflation rate, social security cost of living increases are tied to the national inflation rate and many people have raises, salaries or bonuses that are tied to the inflation rate. As you can see, the official national inflation rate is a pretty important thing.
People can use this information to take advantage of the differences in inflation across the county. If you’re retired, you might want to move to an area of the country that has lower than average inflation if you’re living on a tight budget and can’t afford the higher price increases that might occur in some parts of the country.
However, if you’re just starting out in your career, you can take advantage and live in a higher inflation area to get larger salary increases early on in your career. Then, once you’re comfortable with your salary, try to find an area with a lower inflation rate but will match your current salary that has risen faster than it would have in the area with lower inflation.
Of course, inflation isn’t the only factor to consider. Chances are, cost of living could be just as, if not more, important than inflation in many of your decisions.
Is your personal inflation rate higher than the national inflation rate based on the goods and services you consume? Or do you think you think the good and services you consume actually have a lower inflation rate than the national average?