The Government announces the general inflation rate every month, usually between 2% to 5%. Taking this cue, my employer raises my salary by 5% a year. This is so we can keep up with the general inflation. However, I feel poorer and poorer every year. Do you feel the same? Here are some reasons why.
Personal inflation rate (aka Higher commitments)
Your personal inflation rate may not be the same as the general inflation rate. While the general inflation rate is 5% each year, your inflation rate could be higher as you go through different stages of your life.
For example, a working couple earns a combined income of $3,000. Out of this, $1,500 is used for paying necessities, $1,000 for savings and $500 for discretionary spending such as entertainment.
One year later, their employers raise their salaries by 5%, thus making their combined income at $3,150. Now they also have a newborn. The need to buy baby supplies, higher medical bills and the need to rent a bigger space have resulted in them spending $2,000 in necessities. They continue to save $1,000 but are left with only $150 for discretionary spending.
Because the couple feels that their discretionary money or “extra money” has shrunk, so they feel their incomes do not keep pace with the inflation. But it is actually their personal inflation that is causing them to feel this way.
We experience this when we move through different stages of life such as moving out, dating, marriage, starting a family, buying a home, kids starting school and colleges among others.
Higher standard of living
As we adopt a higher living standard, so will our expenses increase. Upgrading from a 2-bedroom to a 3-bedroom usually means higher monthly mortgage repayments. Some switch from coffee at McDonalds to coffee at Starbucks for your caffeine fix. Some install cable TV. All these will add on to our monthly expenses “committed” expenses.
Inflation rate differs from region to region
Historically, inflation rate in the urban areas is higher than rural areas. This is because more people migrate and live in the urban areas, resulting in higher demand for housing, transportation, food, goods and services. The higher demand urban areas causes prices to increase faster than the rural areas where the demand is lower.
Outdated methodology in computing inflation
Inflation is calculated by comparing the current prices versus last year’s prices of the items in the inflation basket. However, the items in the inflation basket may not reflect the expenses of the general public. People in the urban areas spend differently compared with rural areas.
In keeping the official reported inflation figure as low as possible, the Government could be motivated to use outdated methodology in computing inflation, or simply include only the basic necessities into the inflation basket. Items such as cars, computers, childcare and tuition are deemed “luxuries” and not included in the basket even though these expenses could form a bigger portion of our budget.
In my opinion, the best way to track your inflation rate is to look at how much and on what you spend last year. Compare that to how much and what you spend on this year. Then you would have a good estimate on your inflation that is coming from a change in lifestyle and the general inflation.