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Understanding
Your Inflation

Written Sunday 04/23/06 by Joe Rossini

Powerful computers have been instrumental in shaping the way we think and act for the last few decades. We just can’t get enough statistical data fed to us, to justify all that goes on around us daily. While I enjoy studying the facts in many lists and reports gathered by good investigative research, I have difficulty regarding the Consumer Price Index (CPI) as a true measure of my INFLATIONARY pressures.

If you are responsible for paying your household expenses, is it conceivable to you that the CPI represents the true measure of inflation in your household? Are your expenses up only 3.7% for the first three months of 2006? In this lesson, we will dig deep, in order to understand this index which is widely used to make critical decisions. I believe it’s important to understand inflation and make wise choices about present and future expenditures.

First let’s identify what the CPI is, from the official BLS website: “The Consumer Price Index is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. The Bureau of Labor Statistics (BLS) has classified all expenditure items into more than 200 categories, arranged into eight major groups. Major groups and examples of categories in each are as follows:

  • FOOD AND BEVERAGES (breakfast cereal, milk, coffee, chicken, wine, full service meals and snacks);
  • HOUSING (rent of primary residence, owners' equivalent rent, fuel oil, bedroom furniture);
  • APPAREL (men's shirts and sweaters, women's dresses, jewelry);
  • TRANSPORTATION (new vehicles, airline fares, gasoline, motor vehicle insurance);
  • MEDICAL CARE (prescription drugs and medical supplies, physicians' services, eyeglasses and eye care, hospital services);
  • RECREATION (televisions, cable television, pets and pet products, sports equipment, admissions);
  • EDUCATION AND COMMUNICATION (college tuition, postage, telephone services, computer software and accessories);
  • OTHER GOODS AND SERVICES (tobacco and smoking products, haircuts and other personal services, funeral expenses).
“Also included within these major groups are various government-charged user fees, such as water and sewerage charges, auto registration fees, and vehicle tolls. The CPI also includes taxes, such as sales and excise taxes, that are directly associated with the prices of specific goods and services. However, the CPI excludes taxes, such as income and Social Security taxes, not directly associated with the purchase of consumer goods and services. The CPI does not include investment items, such as stocks, bonds, real estate, and life insurance. (These items relate to savings and not to day-to-day consumption expenses.)”

“For each of the more than 200 item categories, BLS has chosen samples of several hundred specific items within selected business establishments frequented by consumers, using scientific statistical procedures, to represent the thousands of varieties available in the marketplace.” So now you have the official guidelines to better understand the CPI. I believe it behooves each of us to study this CPI explanation, if you are using these inflation numbers to plan your current budgets or for your future living expenditures.

In reviewing these categories of products and services, are they rising only 3.7% thus far this year in your household? If you use Microsoft Money or Quicken to track your expenses, compare last year to this year’s expenses in a spreadsheet to determine your own household’s CPI. You may find you are way over 3.7%. You may also notice that there are lots of items you purchase that are not included in the CPI and are up well over 10%. For example property taxes; medical insurance; home owner’s insurance; and electric bills are not included. Also not specifically found in the CPI basket are high speed internet bills; movie rentals; music down-loads; ring-tones; and text messages your kids keep purchasing? I'm sure you are spending much more on these items this year verses last.

In order to fully understand your household expenditures and determine your own rate of inflation – you need to invest some quality time tracking and analyzing your own individual expenditures. While the CPI may be an accurate index for the items tracked by the BLS, inflationary pressures go well beyond this index. Crunch your own numbers; understand your own INFLATIONARY pressures; and make wise choices each and every day.


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