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Even though normally we all use a specified inflation rate per country for financial calculations (i.e real returns, salary increases, etc..) isn't it possible for the inflation rate to have different impact on different individuals? In that case, is it possible to estimate one's individual inflation rate as opposed to a population wide average inflation rate?

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Inflation gets a lot of press but people rarely stop to think about how they would measure inflation. Prices do not go up equally for all items in the market. Market prices are ever changing in response to supply, consumer demand, and money devaluation. New money printed by the Fed (in the US) may flow into one area of the economy and not affect other areas which would causes certain items to be more inflationary than others.

As you mention, different people will have varying levels of exposure to the items that are inflating more rapidly than others. I may have a long commute to work so I'm more exposed to rising prices in gas. You may live in a city and walk to work so gas prices do not affect you as much. I may be a vegetarian so I'm not sensitive to meat, pork, and chicken prices. There are also lots of items that I never purchase that are used to calculate the inflation rate. Inflation is not as easy to measure as some think.

The only way I know to measure a personal inflation rate would be to track your expenses every month (by unit - $ per 16 oz of bread, $ per gallon of gas, etc.). If you see your personal inflation rate rising faster than the government rate then you know you are more exposed to inflation (at least according to the government's way of measuring inflation - which uses hedonics, geometrically weighted averages, substitution, and other political magic).

In short, if your expenses do not match the CPI expense distribution (see chart) then you will not have the same level of exposure to the government reported inflation. alt text

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    Great answer Muro. Just to compliment it. Inflation is calculated on a very specific basket of goods which are tracked on an ongoing basis. It's a long list and is weighted in various ways intended to reflect the experiences of the average consumer. Obviously this won't be exact for anyone. Calculate your own by selecting your own standardised basket of goods and tracking your expenditure on them every month. – Turukawa Jan 24 '11 at 8:08
  • Great answer. The best way would be to keep a track of expense and categorize the expenses as above. And track the increase. It could also be because of affordability, but in the end that's what your real increase is inflation + Lifestyle increase. This would give you a figure that you should use to calculate your expense at retirement. – Dheer Jan 24 '11 at 16:02
  • Absolutely true. But the catch is: Unless you buy exactly the same collection of goods in the same quantity every month, it's not clear how you would calculate your "personal inflation rate". Like, last month I paid the rent and the electric bill and bought some groceries, my total expenses were $1000. This month I bought all that and I also bought a new car, total $25,000. Zounds, my personal inflation rate is 2400% per month! Okay, you'd presumably realize that's an extreme case. ... – Jay Sep 16 '16 at 14:07
  • ... But say I spend $300 on groceries in January and $330 in February. Is it because prices went up 10%, or because I bought somewhat larger quantities or bought some more expensive items? Even if I figured out exactly what caused the increase, how do I factor that into a calculation? The only way to get a meaningful number is to use a constant set of goods for every time period. – Jay Sep 16 '16 at 14:09
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Inflation is the devaluation of currency based on the rising cost of goods or services. So unless the person is seeing prices rise for them alone, I don't think the concept of personal inflation makes any sense.

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    No, but the particular sets of goods a person buys could have a higher inflation rate than the "average". In this sense, a person could just keep track of prices changes in the goods they buy and obtain a "personal" inflation rate. – Esteban Araya Jan 24 '11 at 3:45
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    John - I think the question has merit. Say I live in a rent controlled apartment, work from home (zero transportation costs), but pay for my 2 kids to go to college. Higher education has been running much higher cost year after year that general inflation, no? Given this contrived scenario, I experience a different, higher rate than you. Each year an article publishes the "12 days of Christmas" inflation. Why not a Joe's inflation? – JoeTaxpayer Jan 24 '11 at 18:16

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