How are rising costs impacting your household? Here’s how to calculate your personal inflation rate

It’s likely no surprise to hear that prices have been rising across the U.S. economy, whether at the grocery store or the gas pump.

But just how much have your personal household costs increased, and how does that stack up against the average American’s?

Calculating your personal inflation rate can help answer these questions.

The Consumer Price Index is a common inflation measure. Households paid 8.6% more money in May 2022 for a broad basket of goods and services relative to that same basket in May 2021 — the largest annual jump in more than 40 years.

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However, your basket is likely different. For one, purchases and consumption habits vary from household to household, based on factors such as income, age and geography, according to Brian Bethune, an economist and professor at Boston College.

This means your personal inflation rate likely diverges from the U.S. average, too.

There are a few ways to calculate your inflation rate. The pitfalls of such a calculation came into focus on Monday when Nikki Haley, former U.S. ambassador to the United Nations during the Trump administration, tweeted an incorrect estimate for a July Fourth cookout.

(Her tweet, which has since been deleted, pegged a barbecue as 67.2% more expensive relative to last year. By comparison, the American Farm Bureau Federation said costs had increased 17% — a much smaller increase, though still elevated. President Joe Biden cited that agriculture trade group in 2021 when the White House said costs for an Independence Day BBQ had decreased $0.16 relative to 2020.)

Here’s the simplest way to get a rough estimate of your personal annual inflation rate, according to economists.

1. The first step is to determine how much of your spending falls into certain categories or buckets, such as food, energy, clothing, housing and entertainment.

   To do this, you’ll need to consult your bank and credit card statements for the past year to find exact spending amounts. The U.S. Bureau of Labor Statistics publishes a detailed list that can help you itemize your purchases by category.

2. Calculate your category “weights.” This weighting is basically the share of your spending devoted to specific buckets. (The Consumer Price Index calls this weighting “relative importance.”)

   To do this, tally your total spending within categories. Divide each number by your aggregate annual spending to calculate the category weight.

   For example, let’s say my total household spending from May 2021 to May 2022 was $50,000. I spent $17,000 (or 34% of the total) on rent and $6,000 (or 12%) on groceries. Their category weights would be 0.34 and 0.12, respectively.

3. Reference the BLS table of detailed expenditure categories again. The “unadjusted percent change” column shows the average annual percent increase in price for each item.

   For example, rent payments increased 5.5% in the year through May. The price of food at home (groceries) rose 11.9% in the same period.

4. Multiply the category weights in step 2 by the annual percent change for those categories in step 3. Using the above example, you’d multiply 0.34 x 5.5 for the rent calculation. Multiply 0.12 x 11.9 for food. And so on for all other spending categories.
5. To determine your personal inflation rate, add up the category totals from step 4. (In the above example: 1.87 + 1.428 + etc.) This total is your annual inflation rate expressed as a percentage.
6. Compare your rate to the national average. For annual spending through this May, a percentage that’s lower than 8.6% means your costs haven’t increased as much as the average American.

   A higher number means your costs have risen more in the past year. Of course, households generally think in terms of dollars and cents, not percentages.

The above calculation compares your household experience to the average American, based on the differences in goods and services, as well as the quantity, that each household buys. However, the formula leverages price averages for those goods and services — meaning it’s not a hyper-individualized calculation.

Consumers can do some additional calculations to get a more precise understanding of how their individual household spending has changed from year to year:  

1. Tally all expenses from your bank and credit-card statements in the past 12 months, as well as for the prior 12-month period.
2. Subtract the totals and divide by the first year’s spending. For example, let’s say my spending was $50,000 from May 2021 to May 2022, and it was $45,000 from May 2020 to May 2021. Divide the difference ($5,000) by $45,000.
3. Multiply that number from step 2 by 100 to determine your personal annual inflation rate.

In the above example, I’d multiply 0.111 by 100. My personal annual inflation rate over that period would have been 11.1%.

There are a few caveats. For one, you’re likely unable to account for any spending made in cash. It’s also likely you’ve sought out less-expensive alternatives where possible (substituting less expensive foods, for instance), or maybe you’re driving less to save on gasoline.

This all means your calculation might not be 100% accurate, but it will be in the ballpark.

Further, costs aren’t rising in a vacuum. If you’re working, your income has likely increased, too. Average wages are up 6.1% in the past year, according to the Federal Reserve Bank of Atlanta. They haven’t kept pace with the average inflation rate, but more household income erodes some of the financial pain.

“If you have to shell out more dollars just to get the same items and your income isn’t keeping up with that, then your quality of life is deteriorating,” Alex Arnon, associate director of policy analysis for the Penn Wharton Budget Model, said of inflation’s impact.