If the last two years have taught us anything, it’s that inflation can become a formidable bar to clear when trying to achieve financial independence in the future. The inflation report, known as the Consumer Price Index (CPI), is released every month by the Bureau of Labor Statistics. It’s meant to measure the average price changes of a basket of goods and services as a proxy for inflation. There is a trimming mechanism that the BLS uses that is designed to remove the volatility of certain goods and services from month to month. (It’s akin to swimming or gymnastics scoring in the Olympics when they throw out the high and low scores.)
The Core CPI is a trimmed number that excludes food and energy prices. You can make a case that it’s fair to exclude those numbers, as they do tend to go up and down in a more volatile fashion. However, if they are staples that we spend our money on routinely, it would also be fair to include them.
There are even more measures of inflation modeling than you probably have even heard of. Have you heard of the Supercore Inflation index? How about the Multivariate Core Trend (“the MCT”) Model? How about the Underlying Inflation Gauge (“the UIG”) model? These are all different models to trim the same cat. It’s confusing, isn’t it? If I was a cynic, I’d think that the government is trying to confuse me.
The only inflation measure that matters to me is the one reflected in my own personal accounts. If my consumption levels are the same quantity, it makes sense that I should know how much more my same basket of goods and services has cost me year over year. Car insurance, health insurance, cable bill, internet bill, natural gas bill, electricity bill, grocery bill, car fuel, etc. Each of us has a list of goods and services we consume on a consistent basis. We can calculate month-over-month and year-over-year personal data that should accurately reflect our Personal CPI.
It’s your Personal CPI number that will determine your own personal inflation bar. For some, it’s probably less than the number the government publishes each month. For others, it’s likely higher than the number the government publishes each month. I calculated it for my household, and our year-over-year “Personal CPI” has averaged over 5% for each of the last two years, which equates to double-digit inflation over the full two years.
When my Personal CPI is elevated, I can act in a couple of ways. First, I recalibrate my investment risk level to address the higher demand for outperformance of my appreciating assets. Second, I look to trim non-critical personal expenses to alleviate some pressure on my monthly budget (e.g. – dine out less often). If you want help in determining your own Personal CPI, we can show you some tools to start tracking it.
