The U.S. Bureau of Labor Statistics (BLS) publishes a Consumer Price Index (CPI) every month. The goal is to capture an accurate inflation rate for the economy, i.e., how fast prices are increasing for consumers. The September CPI report showed that inflation was up 3.7% year over year and core inflation (ex. food and energy) was up 4.1% year over year. A consumer may read this report and scoff – my expenses went up much more than 3.7%. And why do I care about an inflation number that excludes food and energy? I had to eat, and drive my car last month. Price increases in those categories impacted me.

The BLS calculates its CPI number by sampling a basket of consumer goods and services. The basket is developed from detailed expenditure information provided by a sample of individuals and families. This survey is done over a 2-year period to incorporate both frequent purchases (e.g., groceries) and less frequent (e.g., a car). It takes the average dollar weight of purchase to create the basket.

Once the basket is created, the BLS must create a list of the proper items to price. Items are cycled in and out over four years.  For example, for the price of cheese at a specific location, the BLS would sample one type of cheese, at one size, for one brand. The type and size are chosen based on the popularity within its category, i.e., the more popular type and size is the more likely to be sampled. Once the details are settled, that item is in the basket for four years. The survey samples a different type, size, and brand for each location. This creates a dynamic basket with a wide variety of styles and brands for each item.

As all this suggests, the basket is a sample that attempts to replicate the average consumer but not any specific individual or family. In reality, the basket itself will vary from person to person. A young family that just purchased a home will have a much higher housing expense than a retired couple who paid off their house years ago. On the other hand, the retired couple may have much higher medical expenses. A third example is a recently graduated young professional that pays less than the family for housing but spends a fair amount on restaurants and other entertainment. This does not even account for items making up the basket – the family may buy generic brands in bulk while the young professional buys small high end brand servings.

Eagle Ridge estimated three different baskets, and corresponding inflation rates, based on a hypothetical young professional, family of four and a retired couple, using the September inflation report. As shown, the baskets differ, and the inflation rate differs. The young professional has the highest inflation rate at 5%. The family of four’s inflation rate is 3.1%. And the retired couple is facing a 2.9% inflation rate.

The corresponding inflation rates for each category also differ for each hypothetical example. For instance, the young professional experienced 1.5% inflation within the Household/Personal basket versus the family of four, whose costs rose 3.9% within that category. This is largely due to the family of four having large childcare and domestic help expenses, which drive up the inflation rate of their household/personal expenses.

The young professional’s largest expenses are within the housing and variable/discretionary categories, which have corresponding inflation rates at 6.7% and 5.6%, respectively. However, the sub-category expenses that encompass those categories differ from the family of four or the retired couple. For example, renting as opposed to owning a home impacts the total housing inflation experienced as renting costs have risen 7.4% year over year. Homeowners like the family of four, who have low fixed rate mortgages, are insulated from these price increases and only experienced housing inflation of 1.2% (property taxes, utilities, repairs, etc.). If the same family had purchased their home recently in the new higher mortgage interest rate environment, or had to refinance, their housing inflation would increase to 5.6% and drive their overall inflation to 4.6%.

The modeled retired couple spends a lower percentage (22%) of their total budget on housing than the young professional or the family of four. Alternatively, health expenses and insurance comprise a larger share of the retired couple’s total spending, which is the only category that experienced modest disinflation year over year. The resulting total inflation for this retired couple is only 2.9%, the lowest of the three examples. Chances are your inflation rate differed from the reported CPI, but this does not mean the report should be dismissed. It is a fair representation of the overall inflation in the economy based on a robust sampling process. That means the Federal Reserve, economists and market participants can rely on the report when setting interest rate policy and market expectations, making it a valuable tool. Overall inflation trends are moving in the desired direction even if individual to individual and family to family inflation rates have varied experiences.