Inflation is at 6.8%! What exactly does that mean?

You may have noticed it at the gas pumps or the grocery store. Gas is over $3.00 a gallon in most of the U.S. and meat just isn’t as cheap as it usually is (some meat products are actually up 20% year over year). Used car prices are through the roof and housing costs continue their upward trend.

Honestly, things just aren’t quite as cheap as they used to be. With supply chain issues abundant and incredibly high consumer demand, the Consumer Price Index (CPI) has hit its highest point since 1982 at 6.8%. What exactly does this mean for you? It means that given a “basket of goods” that are commonly purchased, those goods are 6.8% more expensive than they were at this time last year. We’ll break down CPI, the most commonly used measure of inflation, below:

Inflation has hit it’s highest rate since 1982

The U.S. Bureau of Labor Statistics defines CPI as:

The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a representative basket of consumer goods and services. The CPI measures inflation as experienced by consumers in their day-to-day living expenses. Indexes are available for the United States and various geographic areas. Average price data for select utility, automotive fuel, and food items are also available. CPI indexes are used to adjust income eligibility levels for government assistance, federal tax brackets, federally mandated cost-of-living increases, private sector wage and salary increases, poverty measures, and consumer and commercial rent escalations. Consequently, the CPI directly affects hundreds of millions of Americans.

What does this “basket” of goods consist of?

CPI measures the costs of over 200 categories of goods in eight major groups and examines year-over-year price changes. The 6.8% number you see reported in the news is the percentage change of that basket of 200 good-categories from last year. For the month of November 2021, it compares the average price of these goods as compared to November of 2020. The eight major groups and examples of categories in each is below:

  • Food and beverages (breakfast cereal, milk, coffee, chicken, wine, full service meals, snacks)
  • Housing (rent of primary residence, owners’ equivalent rent, utilities, bedroom furniture)
  • Apparel (men’s shirts and sweaters, women’s dresses, baby clothes, shoes, jewelry)
  • Transportation (new vehicles, airline fares, gasoline, motor vehicle insurance)
  • Medical care (prescription drugs, medical equipment and supplies, physicians’ services, eyeglasses and eye care, hospital services)
  • Recreation (televisions, toys, pets and pet products, sports equipment, park and museum admissions)
  • Education and communication (college tuition, postage, telephone services, computer software and accessories)
  • Other goods and services (tobacco and smoking products, haircuts and other personal services, funeral expenses) 

The Federal Reserve generally aims for inflation to be approximately 2%, but recent increases in consumer demand and supply chain issues have driven that number much higher. The Federal Reserve initially believed that this level of inflation was transitory, but many now think that it may be here to stay. The chart below reflects the inflation rate over the last 20 years (Starting in November of 2001):

Inflation since November of 2001 (Source: The US Bureau of Labor Statistics)

The last few months have seen abnormally high inflation as compared to the last 20 years as indicated by the chart above. Unfortunately, there is little that we can do as consumers to combat inflation, but understanding what it means helps us visualize its effects on our daily lives. One approach to combating inflation could involve offsetting spending on certain items (such as beef) and replacing them with less expensive items, but that is based on consumer preference. You’ll probably notice the price increases nearly everywhere, but some items have been hit harder than others.

One bright spot: a number of programs of programs that adjust for cost of living allowance (COLA) often index to inflation. This may mean more money for you if you participate in one of those programs. $

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