Have you ever seen the news headlines for inflation and wondered “what is that?” Even if you know what inflation is you may still have two other thoughts come to mind:
What your are experiencing for inflation may be different than the official inflation number. So, let us explore the official inflation rate and why it may vary from what you are personally experiencing.
First, what is the official inflation rate?
Note that they state that it “represents” not that it is the exact calculation. The BLS measures a basket of goods and services that they believe represents what the average American is buying. As a result, it is open to plenty of debate over whether it is accurate or not. Setting aside any debate about whether you believe the official inflation number, think it is manipulated or any of those side discussions, let’s focus on understanding its composition. This will at least help you understand why your personal inflation rate may be far different than the official inflation rate.
There are 16 pages of items listed on the BLS website that make up the composition of CPI. Let’s focus on the 19 major categories to gain perspective of what has the biggest influence on the CPI calculation.
Category |
Index Weight |
Change in Price from 7/31/13-7/31/14 |
Rent |
31.5% |
2.9% |
Food |
13.8% |
2.5% |
Energy |
9.8% |
2.6% |
Education & Communication Services |
6.3% |
2.0% |
Medical Care Services |
5.8% |
2.5% |
Transportation Services |
5.6% |
1.8% |
Recreational Services |
3.7% |
2.3% |
Transportation Goods |
3.5% |
0.0% |
Apparel |
3.4% |
.3% |
Household Furnishings |
3.4% |
(2.3%) |
Professional Services |
3.0% |
1.4% |
Recreational Goods |
2.0% |
(3.0%) |
Medical Care Goods |
1.7% |
3.0% |
Other Goods |
1.6% |
1.8% |
Other Services |
1.3% |
2.0% |
Water, Sewer & Garbage |
1.2% |
3.5% |
Alcohol |
1.0% |
.6% |
Household Operations |
.83% |
3.1% |
Education & Communication Goods |
.62% |
(2.8%) |
As you can see from the above information, what you consume the most will greatly affect your personal inflation rate. Unless you are buying all of the items in the basket of goods that the BLS measures, your personal inflation rate will be different. That story becomes even more pronounced when you look at the specific items in the CPI index. For example:
In a future blog post, I will discuss other measures of inflation including the “core” inflation rate that excludes food and energy prices. For now, you at least understand what the official inflation rate is, who produces it, what the major categories are and why your personal inflation rate may be significantly different than the official inflation rate.
Steve Scranton is the Chief Investment Officer and Economist for Washington Trust Bank and is a CFA charter holder with over 30 years of investment experience with equities, tax-exempt and taxable fixed income securities. Steve actively participates on committees within the bank to help design strategies and policies related to client and bank owned investments. Steve also serves as the economist for the Bank and has been a featured speaker for both client and professional organization events throughout the Northwest.