Experts predict low overall inflation this year, but the key word is "overall." Some prices will be rising a lot more than others. Here's how to fight back.
The overall rate experts are predicting for 2013 inflation is as low as last year: around 2 percent.
Good news, right? Not if you recently took a pay cut, live on a fixed income, or are buying one of the many things where price rises much faster than average. The big-picture inflation forecast might be comforting to economists and lawmakers, but for many of us, that average won’t resemble reality.
In the video below, Money Talks News founder Stacy Johnson takes a look at where inflation is headed this year in categories like gas, college, and health care. Check it out, and then read on for ways to lower your personal inflation rate.
Here’s a recap of those inflation forecasts:
- Core (average of all goods and services except food and energy): 2.0 percent, per the Wall Street Journal
- Food: 2.5 to 3.5 percent, per the U.S. Department of Agriculture
- Energy: no inflation or a slight drop on gasoline; 2.5 higher prices on natural gas; 2 percent on heating oil; 1 percent on electricity, per the U.S. Energy Information Administration
- College: 4.8 percent on public, four-year, in-state total charges; 4.2 percent for public out-of-state and private nonprofits, per College Board
- Health insurance: 7.5 percent per PricewaterhouseCoopers
So inflation is the eye of the beholder: if you focus on gas prices, you may not feel much price pressure this year. But if you’re paying for college and/or health insurance, you could feel a lot.
How inflation is measured
The Consumer Price Index, or CPI is published by the U.S. Bureau of Labor Statistics. Experts often focus on the “core” number – without food and energy – because swings in their prices can distort the CPI. As the Bureau of Labor Statistics explains: “The ‘core’ CPI is closely watched by many economic analysts and policymakers under the belief that food and energy prices are volatile and are subject to price shocks.”
But core, non-core, regional or annual, the inflation rate you see on the news probably won’t match your personal rate. Even the BLS admits: “It is unlikely that your experience will correspond precisely with either the national indexes or the indexes for specific cities or regions.”
There are eight categories used to calculate the CPI from more than 200 products and services at more than 23,000 establishments in urban areas across the country. Here they are, with what they include and how they’re weighted:
- Food and beverages (16 percent of CPI) – Includes groceries as well as restaurant prices, snacks, and alcohol. A little more than half is from food at home, and the rest is from eating out.
- Housing (40 percent of CPI) – About three-fourths of this number comes from rent and owner’s equivalent rent. The rest is split between utilities and furniture.
- Apparel (4 percent of CPI) – Men’s shirts and sweaters, women’s dresses, shoes, jewelry. Women’s stuff is the bigger chunk.
- Transportation (17 percent of CPI) – Mostly new and used car prices, but gas, maintenance, car insurance, and airfares account for a fraction.
- Medical care (6 percent of CPI) – Prescription drugs and medical supplies, physicians’ services, eyeglasses and eye care, hospital services.
- Recreation (6 percent of CPI) – TVs, cable, pets and pet products, sports equipment, movie and theater admissions.
- Education and communication (6 percent of CPI) – About half is college-related, and the other half is postage, telephone services, and computer stuff.
- Other goods and services (4 percent of CPI) – Tobacco and smoking products, haircuts and other personal services, funeral expenses.
Given this breakdown, it’s a little easier to see how inflation actually affects you, and what you might be able to do about it. Here are some ideas to hedge against the biggest increases…
- Invest. A quick look at the BLS inflation calculator shows that the price of goods has risen more than 230 percent over two decades. (You’d need $2,385.71 to buy in 2012 what cost $1,000.00 in 1982.) If that inflation rate repeats, you’ll need to earn at least 4 percent annually to stay ahead. You can’t do that in a risk-free bank account, but it’s entirely possible with some risk in investments like the stock market. Check out How Do I Get Started Investing? for some pointers.
- Eat smarter. There are plenty of ways to save on food, whether you eat out or at home. For starters, buy in bulk and on sale, freezing what you don’t need immediately; try generics when brand doesn’t matter; check out Getting the Best Value for Your Fast Food Fix, and our regularly updated deals page, where there are food freebies and discounts almost every day of the week.
- Look for lower rent. Homeowners don’t have to worry about the 40 percent of the CPI accounted for by housing. If anything, they probably want their home values to inflate. But renters should always be looking for a better deal.
- Buy a used car. Gas prices are predicted to stay the same or drop slightly this year. (And drop a little more in 2014, according to early forecasts.) But if you’re shopping for a vehicle, better fuel efficiency still saves more in the long run. And unless you can get significantly better mileage for the price buying new, you’re much better off buying slightly used and putting the savings toward your gas.
- Seek financial aid. This seems like obvious advice for the college-bound, yet as we explained in 25 Bizarre Scholarships, much of $3.4 billion in free financial aid goes unclaimed every year. Check out 8 Smart Ways to Save on College Textbooks for help saving your back and your wallet too.
- Give your health insurance a checkup. If you don’t have coverage through your employer, comparison shopping insurance rates can save more than an apple a day. If you don’t have coverage, Stacy covers several resources in Can’t Afford Health Insurance? Here’s What to Do. Don’t forget that by 2014, everyone with an adequate income has to get insurance or pay a penalty. But with state insurance exchanges gradually coming online, you may have some new options worth checking out.
Bottom line? Inflation matters, though the number you see in the headlines probably won’t square with the price tags you see in the store. That doesn’t mean you just have to accept it, though. For more ideas, check out 5 Tips to Protect Your Savings From Inflation.