2010 Inflation Predictions

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What's it going to cost to gas up the car this year? How about health insurance? And are college costs going up? Let's find out.

The good news: inflation should remain tame this year. The bad news? The good news may not affect you personally, depending on what you spend your money on.

The way we define inflation in America is straightforward enough: the Bureau of Labor Statistics looks at price changes on a broad basket of consumer goods, weights them, then boils it all down to one nice, neat little number called the Consumer Price Index, or CPI. But unless you’re spending money on every component of that basket in the same proportions as the BLS assumes you are, your personal inflation rate may be entirely different from the national average.

Two takeaways from the news story above: 1. Inflation shouldn’t be a worry in 2010; 2. Unless you’re buying stuff that’s going up more than the inflation rate.

Once you understand a little more about the way the BLS computes the CPI, you’ll get a better handle on how inflation might affect you; and more important, what you can do to keep your personal inflation rate as low as possible. So let’s break it down.

The goods and services used to calculate the CPI are collected in 87 urban areas throughout the country from about 23,000 retail and service establishments. There are more than 200 products and services sampled, but they can be broken down into the following eight categories. Here they are, along with the weighting that each category receives in determining the final overall inflation number. (Note: they don’t quite add up to 100 because I rounded them.)

  • Food and BeveragesPercentage of CPI: 16% All manners of food and drink, including full service meals, snacks and alcoholic beverages. A little more than half of this total comes from food and beverages at home, a little less than half comes from price changes in restaurant meals.
  • Housing – Percentage of CPI: 40% About ¾ of this number comes from rent and owner’s equivalent rent. The rest is roughly divided equally between utilities and furnishings.
  • Apparel – Percentage of CPI: 4% Men’s shirts and sweaters, women’s dresses, shoes, jewelry. Women’s stuff is a bigger chunk than men’s. (Astounding!)
  • Transportation – Percentage of CPI: 17% Little bit gas, little bit maintenance, little bit car insurance, little bit air fares, but mostly new and used car prices.
  • Medical Care – Percentage of CPI: 6% Prescription drugs and medical supplies, physicians’ services, eyeglasses and eye care, hospital services.
  • Recreation – Percentage of CPI: 6% Television sets, cable television, pets and pet products, sports equipment, movie and theater admissions.
  • Education and Communication – Percentage of CPI: 6% About half is college-related, and the other half is postage, telephone services and computer stuff.
  • Other Goods and Services – Percentage of CPI: 4% Tobacco and smoking products, haircuts and other personal services, funeral expenses.

Now that you know more about how inflation is computed, let’s see if we can use this information to change (lower) our personal inflation rates.

Food (16%) There are hundreds of ways to save on food, from coupon sites to smart shopping tips. As for eating out, again there are plenty of ways to save. For example, eating an appetizer at home and splitting en entre out will cut your cost by 50%.

Housing (40%) A person who owns their own home isn’t affected by this at all. In fact, homeowners should really want this part of the index to skyrocket, since that would reflect higher home values. If you don’t own a home, now might be a great time to take the plunge. I’ve done plenty of stories that can help.

Clothing (4%) isn’t a very big component of CPI, but one could easily keep their costs down by buying on sale, buying used or using my method and simply not buying at all. (Virtually everything I wear I’ve received as Christmas presents, and I wear it until it either completely dissolves or my girlfriend takes it to Goodwill behind my back.)

Next to housing, transportation (17%) is the largest component of what we regard as inflation, and most of that is made up of how new cars escalate in price. Since buying a new car is pretty much a waste of money anyway, this part of the CPI could be addressed by buying used. And there are plenty of tips to lower your car costs.

As mentioned in the news story, medical expenses (6%) continue escalating, particularly for those of us who are self-employed. I’ve kept my costs down by getting a large deductible ($5,000), shopping my policy often, and doing what I can to support changes in our current disgraceful healthcare system.

Recreation costs (6%) are about as heavily weighted in CPI as medical costs. In this category, there are tons of ways to save, from negotiating a lower cable bill to using the library to fulfill some of your DVD and book needs.

As you also noted in the story above, rising education costs (6%) should be a huge concern for those financing a college education. But there are dozens of ways to soften the blow, from saving on textbooks (see my story on that) to college savings plans. Here are some stories about college savings.

Most of the “other” category (4%) concerns itself with toiletries (can you say “Sam’s Club?”) tobacco (you know what to do there) services like funerals (here’s a story about saving on that) and legal expenses, which you can also manage.

Bottom line? When you hear about inflation, tame or not, remember first that the overall number may not apply to you and even if it does, you can influence your personal inflation rate. A good reason to keep coming back for more smart shopping tips!

Stacy Johnson

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