Personal inflation: How to determine your personal inflation rate?

The CPI inflation number for April 2022 was 7.79%. But your annual expenses could have increased at a much higher rate. Here’s how to determine your personal inflation, compare it with CPI, and use it while making investments.

Personal inflation vs CPI inflation What’s the difference

Inflation is the general year-on-year increase in the prices of goods and services. For example, on 12 May 2022, the Ministry of Statistics and Programme Implementation (MOSPI) released the April 2022 inflation numbers. The Consumer Price Index (CPI) for April 2022 increased by 7.79%. This means the price of goods and services (rate of inflation) increased by an average of 7.79% year on year.

Should you be worried about inflation?

The simple answer is ‘Yes’ if the return on your investments is lower than the inflation rate. For example, as of April 2022, the inflation rate is at 7.79%, and most banks are paying around 5% interest per annum on one-year fixed deposits. So, if your money is growing at 5% p.a. and your expenses are increasing at 7.79% p.a. (consumer price inflation), your investment is giving you a negative return.

For example, if you invested Rs 100 for one year, you are getting Rs 105 (pre-tax), and your expenses (cost of living) are Rs 107.79. So, you will have to take Rs 2.79 from your pocket to maintain the same lifestyle. In another way of looking at it, inflation is eroding the purchasing power of your money. So, you should build an investment portfolio in such a way that it gives your good returns after considering inflation.

Also Read: Should You Resort To Gold During Inflation?

Chart: 1-year CPI inflation trend

Inflation Trend

The above chart shows how inflation in India has been surging for the last few months. Also, with the high prices of food, crude oil, and other commodities, it is unlikely that we will get a respite from inflation in the coming months.

What is personal inflation?

The CPI inflation number released by the MOSPI gives you the weighted average rate of the increase in the prices of goods and services that form part of the Consumer Price Index. However, you may be spending a lot more money on some categories, and hence the impact of price rise in these categories will be more on you.

Personal inflation helps you understand the impact of the price rise in your spend categories on your overall budget. For example, as per the breakup of the overall CPI inflation number, the education inflation for April 2022 was 4.12%. But, if your kid’s school has increased the annual fees by 10%-15%, your personal education inflation will be much higher.

Similarly, as per the breakup of the overall CPI inflation rate number, the fuel and light inflation for April 2022 was 10.80%. But, we all know the petrol and diesel prices have increased a lot (more than 10.80% compared to last year). Also, if you are in a field marketing job, the impact of the fuel price rise will be more pronounced on your budget.

In this manner, your annual increase in spending categories such as food and beverages, clothing, health, recreation, etc., could be a lot more than the CPI inflation headline number of 7.79%. So, you will need to calculate your personal inflation rate.

Also Read: How To Avoid Lifestyle Inflation And When To Embrace It?

How to determine your personal inflation rate?

To determine your personal inflation rate, you will have to dig deep into your expenses. You can take the following steps:

  • List your expense categories in an excel sheet and assign weights to them. You can use the MOSPI inflation data to list the expense categories.Check the amounts that you spent on each category (e.g. your child's school fee). These days, many banking and money management apps give you a breakup of amounts spent on various categories such as food, fashion, healthcare, etc.
  • List the amounts spent in each category in the excel sheet.
  • Now compare the current year's expenses to last year's, and you will get your personal inflation rate.
  • Once you have arrived at your personal inflation rate, compare it with your portfolio return rate. If your portfolio return rate is higher than the personal inflation rate, your real returns are positive. Else your money is losing purchasing power.

Also Read: How To Safeguard Your Investment Portfolio From Inflation?

Always aim for inflation-beating returns

We saw how inflation can silently erode the purchasing power of your money. So, you should always consider your personal inflation rate while making investments. Always aim for inflation-beating returns; that can help you achieve your financial goals.


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