Christine Benz, director of personal finance at Morningstar Inc., Chicago, which tracks 621,000 investment offerings. Morningstar.com
Many retirees and older consumers on fixed incomes keep an eye on the Consumer Price Index for All Urban Consumers (CPI-U) to see if inflation is trending up or down. This helps them figure out how much they should withdraw from their portfolios each year to maintain their current lifestyles…decide what consumer purchases they should cut back on or at least monitor closely…and make adjustments to their investments since higher inflation typically hurts bond values. This is very important now as many experts expect inflation rates to soar. But the problem is that this popular government inflation benchmark may not be giving you an accurate snapshot of how inflation really is affecting your life.
The CPI-U tracks the prices of more than 200 expenditure categories from food and housing to transportation and medical care, weighting some more than others, to arrive at a single national average. However, that average may differ from your personal rate of inflation depending on your spending habits. Example: This past March the CPI-U rate of inflation over the last year was 2.6%. But if you spent a large part of your budget on doctor visits, you’re actually dealing with much higher inflation. The costs for physician services rose at a 5.3% rate.
Better ways for seniors to incorporate inflation rates in their financial planning…
Use the R-CPI-E, the Consumer Price Index for the Elderly, instead of the CPI-U. It’s designed to capture the average spending of adults age 62 and above, which may be closer to your consumption patterns. Example: The R-CPI-E tends to assign much less weight to clothing, food and gasoline than the CPI-U, but overweights housing and, especially, general medical care—a category in which the elderly spend about 33% more of their budget annually than the general population. Since medical-care prices have been rising more quickly than most other consumer prices year after year, the R-CPI-E typically runs hotter than the CPI-U. You can find detailed data from the R-CPI-E at BLS.gov (search for “R-CPI-E Homepage”).
Calculate your own personal inflation rate. Use the online calculator at https://bit.ly/3hg5dTu or download the spreadsheet at https://bit.ly/3eyCiIT. This works best if you already keep track of your annual spending in major categories. It’s particularly useful if you suspect your lifestyle expenses differ considerably from the broad CPI-U average. Example: You live with your children and pay little or nothing in housing costs…or you travel in an RV every winter and have very high transportation expenses.