Personal Finance

Personal Inflation Rate vs. CPI

One of the efforts I had thought about doing for retirement planning was to measure my personal inflation rate in order to have a more accurate value to use than the CPI value. Realistically it’s not going to work – there are too many variables and potential changes in lifestyle. For example over time, our interests may change from cheap hobbies to expensive hobbies, our young son will probably eat more as he gets bigger and will require more money for activities. It will be difficult to separate the basic “retirement spending” from normal spending. The other problem is that there is a fine line between personal inflation rate and plain old overspending. At some point if you are going to retire you have to be able to live within your means even if that entails reducing or eliminating expenditures on activities that you enjoy.

Fabrice Taylor writes in the Globe & Mail about the fact that the CPI doesn’t necessarily match up to the inflation rate that you or I might experience within our lives. This figure is very important for retirement planning since the real rate of return of your investment portfolio is the actual return minus the inflation rate. Taylor refers to a study done in the US which says that the real inflation rate is twice as much as the official rate.

Another good example is financial planning for education costs. I’ve read that post-secondary tuition has gone up about 5% per year over the last decade. If you are doing projections for your education fund then using the CPI will understate the actual inflation since tuition is a big part of the school costs.

Since I’m still a few years away from retirement I don’t worry too much about my assumptions for rate of return and inflation. Personally I use 3% inflation in my calculations which is probably a good enough estimate for my purposes.

7 replies on “Personal Inflation Rate vs. CPI”

This is very true – my biggest issue with CPI calculations is the use of ‘imputed rent’ for housing costs. This measure under represents inflation when housing prices are increasing compared to renting, and under-estimates it when the opposite occurs. This is one reason the US housing market went so crazy – the Fed could proudly proclaim that inflation was under control in 2002-5 when in fact it was spiraling up and up as housing prices continued to increase. We now see the results of such inaccurate accounting.

Investoid: Housing is a great example for the personal CPI. If someone doesn’t own a house and wants to buy one or is buying a bigger house then house price increases will have a huge factor in their personal inflation.

On the other hand if you already own an adequate home and aren’t going to be moving anytime soon, then it may not be a factor at all.


FP – I totally agree with your statement. I guess my comment was more a side note. In terms of macroeconomic policy using imputed rent is not a good choice. It typically misrepresents what inflation the ‘average’ person is experiencing, since our society leans toward home ownership in most major centres.

Imputed rent is a bit of a generalization indeed.

I guess the big problem is that it doesn’t matter how well you define CPI or inflation, it will only be accurate for a small segment of the population. It’s important in financial planning to try to use a reasonable inflation value that makes sense to you and monitor it over time.


Impossible to predict. Far too much up and down…mainly up on anything fixed.

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