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BUDGET
Your Personal CPI
by Mark Solheim

A quarter century has dimmed the painful memories of Americans who weathered the woes of the Carter administration of the 1970s. Still, who can forget the energy crisis, the hostages in Iran and an economy ravaged by stagflation -- double-digit inflation and recession? (You may wish to include fashion on the crisis list, too, although it's a stretch to blame that on Jimmy.)

Back then, inflation made headlines. It eroded paychecks and forced full-time moms to get jobs to help pay for 15% mortgages. Now, inflation barely gets mentioned in a presidential campaign. It has been so low that until recently Alan Greenspan and company worried more about deflation. But you're forgiven if your cost of living doesn't seem so tame. Although the government's main measure of inflation, the consumer price index, shows prices rising 3.2% a year, your personal rate of inflation could be much higher.

Misleading averages

Remember, the CPI is an average. If you don't eat the same foods in the same proportions as tracked by the CPI or you drive your car more than the index assumes -- or if you live on a farm or earn an hourly wage rather than an annual salary -- the inflation rate battering your budget could be far different than the commonly referenced CPI-U, which tracks the spending of urban consumers. Got a kid in a public college? The average 10.5% jump in public-college tuition reported by the College Board hits you a lot harder than the 8.5% increase reported by the CPI, partly because it assigns a weighting of only 1.2% of a typical family's spending for college tuition. (If the $11,000 average cost of a year at a public college is just 1.2% of your spending, you're spending at a clip of about $1 million a year.)

Pat Jackman, an economist at the Bureau of Labor Statistics, which calculates the CPI, cites three common expenditures in which consumers' real-world experiences seem to diverge from the government's index. The biggie is the cost of shelter. Home prices rose 6.7% on average in 2003, according to Global Insight, but the CPI assumes it cost just 2.4% more to keep a roof over your head. That's because the CPI tracks changes in rents and uses an "owner's equivalent rent" to factor out the investment component of homeownership, such as increases in home equity. But that means the CPI doesn't reflect the decrease in mortgage payments as a result of waves of lower-rate refinancings, nor the spiraling property taxes many homeowners are paying.

Health care is another problematic category. The Henry J. Kaiser Family Foundation found that health-insurance premiums went up 11.2% for 2004, and that increases have been in the double digits for the past four years. The CPI says the hospital-and-related-services category (the closest comparison to health-insurance rates) rose 5.4% for one year and less than 7% a year over the past four years, on average. "Some of that difference is because people are using health-care services more than they once did -- causing premiums to go up more than what the CPI represents," says Jackman. Of course, if you don't have health insurance or are forced to buy an individual policy, the cost spikes are likely to have put your finances on the critical list.

Finally, it can appear that the CPI understates price hikes on major purchases, such as cars and electronics, because it adjusts prices to reflect improvements in quality. So, for example, if last year's $20,000 car now costs $22,000 and the only change is the addition of a $2,000 navigation system, the CPI reflects no increase in the cost of the car instead of a 10% increase.

If you're curious how close your family's inflation rate comes to the official one, see the table below.

--Research: Jessica Anderson

What's Your Inflation Rate?

The CPI assigns a weighting to each major category of spending and then applies the underlying inflation rate for those expenses. You can get closer to your personal CPI by estimating your own category weightings. We've supplied the latest 12-month inflation rate for each category, through November 1. To get your personal CPI, add the figures in the last column.