Your Personal Inflation Rate Is Not CPI

The CPI is a weighted average of a representative urban household’s basket. You are not that household, and the wealthier you are, the less you resemble it.

Your personal rate is simply the same weighted average run on your own weights:

where $w_i$ is the share of your spending in category $i$ and ${\pi }_i$ is that category’s inflation rate, both of which the BLS publishes by category.

The exercise takes twenty minutes with a year of credit card and bank data, and it is worth doing once, because the categories that dominate an affluent household’s budget are systematically the fast-inflating ones: private school and college tuition, healthcare, childcare, home services and skilled trades, insurance premiums, and property taxes on an appreciating home. Meanwhile the categories where technology has driven prices down — electronics, apparel, communications — are a trivial share of your spending and a meaningful share of the index.

The result is usually uncomfortable: high-spending households frequently run one to two points above headline CPI. If that is you, then every long-horizon number in your plan — your withdrawal rate, your target portfolio size, the real return you need — is calibrated to the wrong deflator. Rerun them with your own.

There is a partial offset worth knowing. Your savings rate is a hedge: the portion of income you do not spend is not exposed to consumer prices at all, and a household saving 40% of gross income has far less inflation exposure per dollar earned than one saving 5%. Inflation is a tax on consumption, and the highest-leverage response to it is the same as the response to most financial problems — own more assets and consume a smaller fraction of your income.