Inflation Forecast 2012 – and How to Lower Your Personal Rate

As usual, the overall rate of inflation experts are predicting for 2012 remains fairly low: about 2 percent.

That sounds like a manageable increase in prices – unless you recently took a pay cut, live on a fixed income, or are buying one of the many things whose prices rise much faster than the average. In short, while that comforting forecast may be just what the doctor ordered for economists and lawmakers, it may not mean much for you or me.

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 percent per Consensus Economics and The Livingston Survey
• Food: 3 to 4 percent on groceries, 2 to 3 percent in restaurants, per the U.S. Department of Agriculture
• Energy: –2 percent (a net drop) on gasoline; 2.5 percent on natural gas; 2 percent on heating oil; 1 percent on electricity, per the U.S. Energy Information Administration
• College: 6 percent on public, four-year, in-state total charges; 5.2 percent for public out-of-state; 4.4 percent for private nonprofits, per College Board (chart on page 10)
• Health insurance: 8.5 percent per PricewaterhouseCoopers

The Consumer Price Index, published by the U.S. government and used to track inflation, includes all these things in part, but the experts usually only focus on the “core” number because of relatively wild swings in food and energy. 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 as Stacy said in the video, other numbers matter – and it’s helpful to break them down into different categories because they can be much higher than the core inflation rate suggests. And even the core average isn’t particularly helpful for individuals, as 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.” So if your expenses are tilted toward the faster-inflating categories, your dollars won’t stretch as far as the hypothetical average person’s.

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. Here are some ideas to hedge against the biggest increases…

1. Invest. A quick look at the BLS inflation calculator shows that the price of goods has risen almost 250 percent since 1981. (You’d need $2,488.78 to buy in 2011 what cost $1,000.00 then.) If that inflation rate repeats, you’ll need to earn at least 4 percent annually to stay ahead. That’s impossible these days in a risk-free bank account, but doable if you’re willing to assume some risk in investments like the stock market. Check out How Do I Get Started Investing? for some pointers.
2. 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.
3. Look for lower rent. Homeowners don’t have to worry about the 40 percent of the CPI housing accounts for. If anything, they probably want their home values to inflate as fast as possible. But renters should always be looking for a better deal.
4. Buy a used car. The good news is that gas prices are predicted to drop slightly this year. But if you’re shopping for a vehicle, better fuel efficiency still saves more in the long run. And as Stacy explained in 8 Tips for Buying a $5,000 Car, you don’t have to spend a lot to get from A to B.
5. Seek financial aid. This seems like trite 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.
6. 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.

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. But there’s plenty you can do about it. Want more ways to hedge against rising prices? Check out 5 Tips to Protect Your Savings From Inflation.