Inflation. Is it CPI or MyPI?

It’s easy to think of inflation as financial weather – something we must endure and can’t control. While it’s true we can’t control the prices that grocers, automakers and landlords charge, we can, and should, control what we spend.

We’re all familiar with the Consumer Price Index, or CPI. It tracks the cost of groceries, rent, utilities and other goods and services most of us use. When the cost of men’s sweaters go up, so does the index.  CPI has been rising only very slowly recently, barely 2 percent a year.

But does the CPI reflect how you live and consume? Probably not. Like all statistical averages, it captures what’s typical for the masses, not what’s specific to you.

What really matters to you is the MyPI, the My Price Index.

Your future, your choices

How will your spending change over time? Will your own cost of living hold fairly steady, or rise over the next 10, 20 or 30 years? Changing prices are part of the equation, but so are your own choices and behavior.

Look into your personal crystal ball. Will your next home be a luxury upgrade or a practical downsize? Will you drive a BMW or a Honda hybrid? Will your vacation be a week in Sante Fe or a month in Singapore?

Will your kids attend UMass or Holy Cross? Will you fill the pantry at Stop and Shop or Whole Foods? Will you be a first adopter of every expensive gadget, or wait for prices to fall?

There are no right or wrong answers to these questions, but your choices definitely influence your MyPI.

Why do we care?

Your personal inflation rate over the next generation or so will have two big influences on your financial outcomes.

First, the higher your MyPI, the less your money can buy when you cash out of stocks and bonds. Put another way, MyPI is what your money needs to earn just to keep up with your spending habits. If your spending rises five percent each year, you need to earn five percent a year on investments just to hold your place in line.

Second, the inflation rate is the cost of holding cash. As we have discussed previously, anyone holding cash – often justifying doing so for its “safety” – loses purchasing power through the relentless erosion of inflation (see our calculator). We typically do not recommend holding cash for that exact reason (except in a short-term emergency fund). The higher your MyPI, the faster any cash holdings decline in value.

Take it personally

While low CPI growth has been a comfort over the last few years, we know higher inflation will return someday. Perhaps more importantly, we know that MyPI can surge at any time, thanks to our choices, priorities and tastes.

Want to know more?
Give us a call at 617-217-2772 – we’d love to hear what’s on your mind