Inflation or Deflation and the True Cost of Living
Hi all. Happy New Year. I had some time off during the holidays and was crunching the numbers for my parents’ imminent retirement to make sure they won’t be hitting me up for money or wind up hugging people at WalMart. So I was wondering just what is our own personal inflation rate? We all get the monthly government updates (CPI) and the core rate number which backs out the volatile energy and food prices. (That never made much sense to me, I can live just fine not buying new shoes, but food and energy I kind of need). So here’s what I did. I have essentially all the bills from 2000-2007 scanned in my computer. (You have no idea how much time this saves in the long run). I went through and entered how much we paid for the gasoline, electricity (ComEd), natural gas (Nicor), water and sewer, land line phone, auto and house insurance, and coffee/onion purchases. About 700 numbers entered. These were the bills that have been consistent over the years.
I was fortunate my parents trust me enough to see what's behind the curtain of household finance. It's less work for them, but was a valuable learning experience for me, and it helped me keep them on their toes (Do you really need to buy that?!)
Two big things you may say are missing, food and medical insurance. Well the food bills aren’t scanned in and were too hard to try and compile. It is a shame since we probably pay more for groceries than the other things. We rarely eat out so our grocery bill is essentially all our food. But my parents do have mail order coffee and onions (a weird combination) so I used those yearly totals to get an estimate of the food inflation. Medical insurance is also a bit tricky since as the company changed hands, different medical groups, I went off their coverage when I got too old, it was really impossible to get a good handle of what was going on. Anyway they take it out of the pay before you get the check, so if I don’t see it, it doesn’t count. And over 65 there is the Medicare. A thing we see as minor, which some of you may see as a big expense is clothes. Honestly, the amount we spend on clothes is less than what most people spend at Starbucks. It’s an infrequent expense and a 20% or 40% sale between years would make the results meaningless. Cable/satellite bill? We don’t have cable or satellite.
Here’s the numbers. I just give the yearly totals (since the energy varies greatly with the seasons) also they are scaled so the year 2000 = 100. I’m not publicly traded so the actually numbers are none of your business. Red signifies we had some deflation in our bills. The total is the weighted total of the categories. I’m just not telling you what the weights are. (Please scroll down. For some weird reason the table is being pushed way down)
|Year||Car Gas||ComEd||Nicor||Water||Phone||Insur.||Coffee &||Total||y/y|
| || || || || || || || || || |
|Ann. ||2.23%||-2.75%||7.81%||2.93%||3.18%||2.50%||5.19%||3.05%|| |
Wow, not as nice as those CPI numbers they put out, eh? Every family is different and some lifestyle changes as well as extenuating circumstances can cause a lot of variability. Given the volatility of the numbers you could definitely argue the starting point can cause a large variation in the annualized rate, but this is what I have, how many of you can say you have 7 years of data on their household bills?
Gasoline – Gas prices have gone from less than $1.50 to over $3.00 per gallon over the past seven years (a 100+% increase) but we went up only 17% and the last two years were headed down? Switching to a slightly more fuel efficient car (we never had an SUV, just an older car) and more efficient driving (shop fewer times) and some more public transportation (it’s accounted for in the table). The peak in 2005 was because of my grandmother’s passing and a lot of driving back and forth. I actually think it will keep going down because as my parents retire, that’ll reduce the driving dramatically. They’re not big fans of “taking a drive.”
Electricity – It’s amazing what a few CFL bulbs and some new more energy efficient appliances can do. Also some smarter use of electricity by turning off things like lights and TVs when no one is in the room. My neighbors have their kitchen light on all night that shines into my bedroom. Let’s just say 10 hours/night * 100 watts * 365 days = 365 kWh/year. We get charged 8.5 cents/kWh, so that’s $31/year just to keep the moths annoyed. We didn’t install solar panels or anything special, just a few changes in the habits. I don’t see it going down much more. Hotter summers and the end of rate freezes mean the bills probably will go up, although it’s definitely something to strive for. I did find a statistic that I couldn’t believe. The average US household uses about 888 kWh of electricity/month. We use less than half of that. People, where is your electricity going?
Natural gas – That one we are kind of stuck with. We live in Chicago and have this thing against freezing. A month or two of really cold weather uses up a bunch of gas and produces shockingly high gas bills. It doesn’t help like in 2001 when natural gas prices went up 270% over 2000 (I think Enron had something to do with this). The other big spike around 2006 had to do with the effects of Katrina. In fact the cost for us has varied between 20 cents and $1.19 per therm, the expensive times usually coming during the winter. Unfortunately I see this going up, another bad hurricane and it’ll go way up. Warmer winters will mitigate this slightly, but like oil, natural gas will keep going up.
Water/Sewer/Trash – These are the city utilities. Most of the variability is due to the use of water. During hot dry summers we do have a fairly large garden and it can take quite a bit of water. But those values are not directly related to the water usage. A friend of mine lived in an apt with her husband and they were using about twice the number of gallons we three people were using living a house and watering the yard! The price of water has gone up 50% over the past 7 years. The sewer/trash bill actually went down because of a senior discount. As to the future, it’ll keep going up. We have this addiction to drinking water, and well you know what happens when you drink too much water.
Phone bill – The amount of calls we make today is practically equal to the number we made 7 years ago. Most of the bill is taxes, fees and charges for keeping the line attached. In 2000, 10% of the bill was for calls, now it’s 6%. I should have bought AT&T back then if I knew how much they charge people. It’ll keep going up.
Insurance – This includes home and auto. While the house insurance more than doubled, the auto insurance went down. Having older cars and no traffic violations really helps. It’ll probably keep inching its way up as prices to get things replaced keeps going up.
Coffee/Onion - Well like I said I don’t have the data from the grocery store, but from the mail order food we buy. They are going up generally a little faster than inflation. But as anyone who shops for food will know anything involving transportation or eating grains like milk, meat, eggs, bread, tropical fruits have been on an upward march mainly because of the ethanol craze and high gas prices. This will keep going up over the years. Time for a diet.
So what is the moral of the story. Yes inflation is here to stay and on a personal level it’s not as nice as Ben and his band of Merry Men would have us believe. It is possible to fight personal inflation by deflating some of our excesses. Our friendly barber raised his prices, so we just go less often. Gas prices go up, shop once a week. Food goes up, we could stand to lose a few pounds, smaller portions. Eventually you can’t go any further, but it’ll definitely help keep expenses under control. There is no hardship with these practices, we don’t notice any difference between now and 7 years ago.
So what did I use for the projected inflation rate for my parents? 5% for our cost of living adjustment and 2% for the government’s CPI (which is tied to social security). I feel these are conservative and it’s a lot better to err on the side of caution especially when projecting out over the next 30 years also to account for grocery bill increases. Good news is baring some doomsday scenarios, their retirement looks good and that’s not even counting equity in the house, life insurance, and what those bellbottoms will fetch on eBay! Those we consider piggybanks that we don't break. I hope this is useful and maybe will inspire people to take a closer look at just what your bills are doing.