Your Personal Inflation Rate Isn’t The Same As The National Inflation Rate

Crazy Inflation

Crazy Inflation

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?

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About Lance Cothern

Lance Cothern, a Certified Public Accountant (CPA) licensed in the Commonwealth of Virginia, is the founder of Money Manifesto. You can read more about him here or connect with him on Facebook, Twitter, Google+ or Pinterest.

Comments

  1. Prices do vary greatly depending on where you live. We’re moving from a dirt cheap area to a more “normal” area… Daycare where we’re moving is astronomical! Fortunately, I found an in-home daycare that will cost only $25 more per week than we were paying here. But, when I first started looking, it really freaked me out!

  2. I’d be interested to hear how many people actually were able to make this work: “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.” I know a few people who have done this, but always have ended up with a lower salary than they were receiving in a high cost of living city.

    • I got a slightly higher salary to move to a lower cost of living area but I know I gave up the opportunity to advance as fast and get as big of raises as I could have in the old city. The good thing is that the cost of living more than made up for it and I am much happier here than I ever was there!

    • Bryce @ Save and Conquer says:

      Lots of people from my office in Silicon Valley moved to a satellite office we have in Albuquerque, NM. They kept their same pay, and as you can figure, their expenses, especially housing, are much less. I’m not sure which area has higher inflation. Probably Silicon Valley.

  3. My Wealth Desire says:

    Base on my experience, I got a lower salary offer on those area that the living expenses is less. Now, we are living in the most expensive city in the region but our apartment rent is much cheaper than the other parts of the city. We found a good area with near grocery store. Plus, it is very near to my kids school.

  4. Interesting thoughts. It seems to me one of the biggest differences between your personal inflation rate and the national average can be caused by buying a house and then living in it a long time.

    If you can fix your #1 expense for the next 30 years while everybody else’s rent is going up your inflation rate will be much lower than average. This probably explains a part of why home owners normally end up better off than renters.

    • Great point, although at that point you’re really talking about the difference in cost between renting and buying. Your property taxes, insurance and maintenance will still likely go up on the house.

  5. Inflation is here and higher than the government statistics! We try to shop differently to control my personal inflation.

  6. Bryce @ Save and Conquer says:

    When I got out of college, I moved to the Silicon Valley. It has always been expensive here, and housing costs are inflating much faster than the national average, yet again. As long as wages keep up with the housing costs, you can typically save more money over your career. Consumer staples, like a can of beans, costs the same here as it does in Kansas. Eventually, we may move to a less expensive location, but it will be based more on family locations than on expenses. (i.e., my wife doesn’t want to live too far from our son.)

  7. Great post Lance, its kinda like the ole saying about real estate…All real estate is local, well all inflation is local. Like you mentioned, the cost of goods and services are different depending on where you live. Take for instance a place like Anchorage, where everything, except fish has to be flown in. You pay a premium for those goods. Come to Tennessee and the cost of those same goods are much more reasonable.

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