Why don’t inflation rate, CPI match?
Inflation has gotten more attention lately as price increases at the gas pump have taken a bite out of Americans’ disposable income. Yet official readings from the Consumer Price Index indicate low levels of inflation, running at around 2% per year.
Many people jump to the conclusion the government’s inflation numbers deliberately understate true inflation for the American public overall. But the way the Bureau of Labor Statistics measures inflation won’t exactly match with any single person’s own spending experience.
For instance, the most commonly cited Consumer Price Index for All Urban Consumers (CPI-U) looks at prices of key goods and services in 75 urban areas, collecting data on thousands of households and retail establishments. It captures 93% of the U.S. population.
The major categories Americans spend on include food, shelter, medical care, transportation and energy. Yet these costs vary greatly from person to person. Older Americans typically incur more health care costs as they age, and many people of all ages have above-average medical needs. Those who have to drive a long way to work incur more in fuel and transportation costs than those who live nearby or can take public transportation.
Inflation eats away at the purchasing power of your savings, and what’s most important in measuring it is how rising prices affect the things you want and need. Don’t be surprised if your personal inflation rate is different from what the CPI number suggests.