Stop Panicking. Here’s How to Calculate Your Personal Inflation Rate.

  • Calculate your personal inflation rate by comparing budget line items from year to year.
  • Focusing on your year-to-year changes can help you stay calm while inflation rises nationwide.
  • Financial planner Nicole Morong recommends comparing changes in groceries and gas spending.

Inflation is defined as the rising cost of goods and services over time. The average annual inflation rate in the US is about 2%, however, due to supply shortages during the pandemic, the inflation rate from May 2021 to May 2022 is 8.6% — the highest it’s been in 41 years.

Instead of panicking about the rising cost of goods, financial planner Nicole Morong at Peterkin Financial coaches her clients to focus on calculating their own personal inflation rate, ie how much inflation is actually costing you.

The inflation rate nationwide is calculated by comparing the average price of goods and services year-to-year, for example, May 2021 to May 2022. Similarly, Morong advises her clients to compare their own budget line items, like groceries, gas, and rent, to calculate their own personal inflation rate.

Panicking about inflation could be hurting your own personal inflation rate

“The way that I approach inflation with my clients is, first, we have a conversation about what the actual inflation rate is for things like mortgage rates, credit cards, gas, and groceries. And then we talk about what their personal inflation rate is , which is based on what you’re personally experiencing. It’s based on what you buy and what your lifestyle is,” says Morong.

She adds, “It doesn’t really matter if gas is $7 a gallon if you take the subway everywhere. But if you drive an SUV, you might be paying for more gas. Even if groceries have gone up in value, maybe you’ ve subconsciously made different habits, and your personal inflation rate is flat when it comes to groceries.”

Morong says getting clarity about your personal inflation rate can help you understand how much you can counteract overall inflation with small, manageable lifestyle changes over time.

Here’s an example of how to calculate your personal inflation rate

First, list how much you spent in each budget category you want to track. For example:

To calculate your personal inflation rate for groceries, use this equation:

Using the example above:

($590 – $450) ÷ $450 = 0.31111 x 100 = 31% personal inflation rate for groceries

Here’s the personal inflation rate from each budget category in the example above, including the total overall inflation rate:

Ask yourself 2 questions after calculating your personal inflation rate

Morong says calculating your personal inflation rate can help you assess why your budget categories rose in cost over time. She says, “Maybe your groceries might have changed this year because you moved back home with your parents, or, if you’re the parents, maybe you spent more on groceries because your kid moved back in. Maybe you’re spending more based on changes in your circumstances.”

She asks her clients the following questions so that they can make empowered decisions:

  • If you’re spending more in certain categories, is this a conscious decision?
  • Given your personal inflation rate, can you still afford to save and invest consistently?

Says Morong, “Calculating their personal inflation rate helps my clients have conversations about how their spending has shifted, and whether adjustments need to be made so that they really feel empowered and in control of their situation, regardless of what someone on TV is saying about inflation.”

Leave a Comment