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How to calculate your personal inflation rate

Inflation: Not wanted parody sign

Have you ever received a measly CPI-adjusted wage rise and felt like the headline inflation rate bears as much relation to your cost of living as a neanderthal tribe does to the Rich Kids Of Instagram? 

CPI inflation and its RPI cousin measure the average change in prices for a representative basket of goods and services bought by UK households. This average figure is highly unlikely to match your spending habits.

In fact, it would be extraordinary if it did. 

Perhaps you don’t smoke, or drive, or have a pet. Maybe you’re a vegetarian, or don’t consume prescription drugs at the ‘average’ rate. Or you could spend more on housing or less on food than is assumed by the official inflation rate methodology. 

My personal inflation rate is closer to Afghanistan’s national figure than the UK’s. 

The reality is that official inflation metrics aren’t designed to reflect your specific situation. And the difference can have a big impact on your investing plans

Best practice calls for us to adjust our investment contributions and target numbers by inflation. Updating like this keeps your portfolio on track to deliver the purchasing power you need in the future.

Given it’s your own future at stake, it’s far better to correct drift using your personal inflation rate than to use CPI or RPI.

Inflated expectations

Inflation is an insidious money-munching monster. Innocuous differences between your rate and the official statistics can have a disproportionate effect on your lifestyle given time. 

For example, the historical UK inflation rate of 3% will halve your purchasing power in 22 years and nine months. 

But a personal inflation rate of 5% halves your spending power in 13 years!

With a healthy lifespan, you could be exposed to inflation for more than 70 years over your combined accumulation and deaccumulation phases.

It’s worth working out what you’re really up against. 

What is a personal inflation rate?

Your personal inflation rate measures the change in prices that are representative of your precise spending patterns. That’s as opposed to the official inflation figures, which calculate the national average. 

Your personal inflation rate accounts for how your situation diverges from the national picture due to your:

  • Demographic and gender
  • Level of affluence
  • Region
  • Housing choice
  • Brand preferences
  • Product and service preferences
  • Choice of vendors
  • Ability to switch to cheaper products or take advantage of offers
  • Ability to substitute – for example to switch to pork if steak becomes too expensive

If you spend more on items with large price increases in comparison to the national average, then your personal inflation will outstrip the official number. 

If you spend relatively more on items with low price rises then you will experience a lower rate of inflation. 

Remember, we tend to be susceptible to the money illusion. This is our very human habit of valuing our wealth in nominal terms (the figure before inflation adjustments) instead of real terms (our actual purchasing power). 

The money illusion gets worse as you age. Your price perceptions are partially anchored by the past. It can be hard for even the money-savvy to update their outmoded notions, such as that a pint of milk should cost 20p or a cinema ticket no more than half a farthing. 

The illusion can be broken by knowing your personal rate of inflation. 

How to calculate your personal inflation rate

Calculating your personal inflation rate starts with tracking your spending.

You can use an online budget tracker or customise your own spreadsheet.

The simplest method is to capture your total annual spend, then calculate its percentage change every year. 

For example:

Year 1 total spend = £30,000

Year 2 total spend = £33,000

Percentage change = (33,000 – 30,000) / 30,000 x 100

= 10% annual personal inflation

This crude method has a problem, though. Many people’s annual spending is pretty volatile. 

For instance, my annual spend shot up 44% one year, then down 16% the next. I’m not advocating I should have increased my investment contributions by 44% in a year and then slashed them by 16%!

(The technical term for that is “nuts”.)

What’s needed is a personal inflation method that smoothes out our consumption patterns.  

Our expenses can be quite benign some years. Other years the consumption gods hit you with spendy thunderbolts like replacing the roof in the same year you get married.

We need to account for that variation.

Two ways to stop your personal inflation rate whipsawing

One method is to track a subset of your everyday expenses and to exclude large and infrequent purchases. 

The Everyday Price Index maintained by the American Institute for Economic Research excludes items such as car purchases, appliances, furniture, and housing. 

What’s left on your budget tracker will be a reasonable indicator of your inflation rate. It won’t be suddenly blown out of all proportion because you moved house one year. 

The second method is to include your large and infrequent purchases, but to notionally spread the cost over time. This enables you to flatten out major expense spikes into a smoother series of annual expenses. You can insert these into your personal inflation calculation. 

If you buy a new car worth £10,000, say, and intend to keep it for 10-years then it shows up as a £1,000 expenditure every year.

Obviously this is a guesstimate. Much depends on how much you spend on a car next time. 

Inflation hedonists

Official inflation indexes can understate inflation if a consumer product improves in quality but doesn’t drop in price.

You get more for your money, and that shows up in the index as a decline in inflation (according to some methodologies).

But say you pay £1,500 for a laptop, and you spent £1,200 on the equivalent model five years ago. You’ll experience personal inflation even if it’s twice as good as your old laptop. 

You can adjust for this ‘hedonic inflation’ by annually noting the prices for similarly-featured, brand new versions of your big-money, irregular expenditures. 

The £1,000 per year expense for the car, in the example above, would be upweighted if newer versions of the same model rose in price.  

Granted, doing this takes some work. But your personal inflation rate will be more accurate in return for a bit of light Googling. 

Alternatively you can assume you’ll stick to your current price point and accept a more basic product than is widely available next time.

That will be an interesting test of your frugal muscle.

Once in a lifetime

You can disregard costs for genuine one-offs for the purposes of personal inflation. Ignore the cost of your wedding or laser eye surgery, and assume you’ll never move house again.

Just make sure those costs are genuine one-offs.

Being sensible about what you ignore will help dampen your personal inflation rate volatility without torpedoing its accuracy. 

Personal inflation annual average calculation

Once you have a few years of data, use a geometric mean calculator to reveal your average annual rate of personal inflation

You’ll now have a good sense of how your personal inflation stacks up against the headline rates. 

My average annual inflation rate is 6.38% vs 1.34% for CPI over the seven-year period I have good spending data for. 

I’ve stayed ahead of inflation by increasing my income by an average of 8.25% per year. But I’ll have to get a grip on my personal rate if I retire early.

I can’t expect my portfolio to punch the lights out enough to cope with that level of inflation when headline rates are so low. 

You can benchmark yourself against the UK inflation rate of your choice by visiting the ONS’ inflation page

Slice and dice

It can be pretty revealing to chop up your spending data into categories. You can then analyse your inflation rate at a more granular level.

My annualised personal inflation rate for groceries is 4.85%. Knowing this figure has given me fresh impetus to rein in the food bill as it’s one of my biggest spending categories. 

Utilities spending has declined by 5.51% annualised over seven years. I even impress myself with that. My gut would have said I’m burning money on heating. My gut is a notorious pessimist. 

I’m going to credit this spending decline to the power of annual switching and installing the most efficient boiler that I could. I also installed smart heating controls. 

How to use your personal inflation rate for investing

Adjust your key investing numbers by your personal inflation rate on an annual basis:

  • Investment contributions
  • Your investment target total
  • Your target income to achieve financial independence (FI)

Step 1 – Add your end of year one personal inflation percentage to 1. 

For example, 5% inflation: 1 + 0.05 = 1.05

Step 2 – Multiply your year one investing contributions by that annual inflation number e.g. 1.05. 

For example, £500 monthly investing contribution:

500 x 1.05 = £525 investing contribution per month in year two

Step 3 – Next year, multiply year two’s investing contribution by the end of year two’s personal inflation number. 

For example, if year two personal inflation is 4% then:

£525 x 1.04 = £546 investing contributions per month in year three

Do the same for your investment target total and your target income to maintain your spending power when you decide to live off your portfolio. 

Personal inflation rate calculators

The only functional UK personal inflation rate calculator I can find is provided by UK fund manager’s Rathbones. 

It still requires you to track your spending. Rathbones is pretty vague about the methodology. 

The BBC host an ONS personal inflation rate calculator but it looks defunct.

There are a few US personal inflation rate calculators. They’re liable to be misleading as they try to squeeze you into Moses baskets representing different US inflation profiles. 

Remember, relatively small divergences can devalue your wealth many times during a human lifetime. For this reason you’re better off calculating your personal inflation rate by hand. 

Don’t blow yourself up

As investors and FI hopefuls we’re rightly warned to fear inflation like a baby chimpanzee is taught to fear snakes. Inflation is the serpent in the garden ready to make off with our nest egg if we’re not wary.

We’re too easily lulled by low official numbers. Meanwhile our goose is being cooked by a personal inflation figure nobody talks about. (Because if you do, people shoot themselves in the head.)

If you already track your spending then calculating your personal inflation rate is easy.

If you’re not tracking your spending – you should be! 

Take it steady,

The Accumulator

P.S. – I love this little detail about the RPI basket of goods from a paper on inflation:

Changes in the price of bacon are represented by back bacon and gammon: it is assumed that other cuts of bacon will, on average, move in line with these two items.

Jim O’Donoghue, Matthew Powell and David Fenwick. “Personal Inflation: Perceptions And Experiences.” 2007.

{ 36 comments… add one }
  • 1 Tom-Baker Dr Who January 26, 2021, 12:47 pm

    This is a masterpiece! I’ll forward it to some friends of mine who often mention that the official inflation figures never match their personal experience. My attempts to explain personal inflation to them were not even half as good as this.

  • 2 Neverland January 26, 2021, 1:03 pm

    Why would you track your historic personal inflation rate when by being a passive investor you explicitly accept that historic active manager performance is no guide to their future performance?

    Seems like a largely useless comfort blanket in an unpredictable world to me.

    You can’t predict when your roof caves in or you need root canal treatment for instance….

  • 3 Chiny January 26, 2021, 1:08 pm

    It is a Good Thing (Reg TM) to monitor expenditure but damn hard work. After a few years in retirement, I gave up as it provided insufficient return on time expended. I’ve moved to a “how much is left per month” tracker, with annual review; equivalent to”how much am I saving”.

    And yes… my first pint cost 1/10.5 (looks awkward, pronounce as: one and ten punse ha’penny) equivalent to 9.5 new p !

  • 4 ermine January 26, 2021, 1:39 pm

    I can’t argue with the premise that you should track spending. But bear in mind that your retired self has a very different spending pattern to your working self. Off the top of my head:

    Things that are lower:

    Commuting – gone
    for parents, childcare – gone, though adult children these days seem to become financially independent at a later age that perhaps you yourself did
    parasitic costs of working eg the lattes and food grabbed on the go – gone

    Things that may be higher:
    medium and long-distance travel, though this is elective so more flexible
    healthcare and medicines in many cases
    heating and power – you will occupy the home more
    eating out and day to day recreational spend (hahahaha at the moment!)

    There’s a UK study of retirement spending that shows wealthy retirees (which is what people on this site will tend to be) have a high-water mark of retirement spending in the 65 to 75 age range. I would say my experience (and I haven’t reached this market) bears it out. I CBA to paint houses and piddle about with the frugal end of DIY. I could change the oil on my car but I am happy to pay a local garage to do the servicing, no more changing a water pump in midwinter by the side of the road like my younger self. We drink better wine. and so on.

    But I have virtually zero work-related costs and I don’t buy coffee outside. I have more time, which lowers costs because I can choose when to pick certain fights with the entropy of life. I can do my washing when it’s dry. I can eat out when there’s an offer on, when such a thing is possible. I can buy my coffee beans from catering suppliers for the next few months, which is cheaper than 500g at a time from Tesco.

    As you get older you have also acquired a lot of the Stuff you want/need, and costs are replacement repairs, not so much acquisition/upgrade. I don’t buy rubbish tools any more, the ones I have last longer. Most of my hi-fi is from the late 1990s. My last washing machine lasted 15 years. And so on.

    Retirement from full-time working is a larger change than most people realise. If your costs aren’t very different when retired than when working, I venture that you are doing something sub-optimal. If there is one take-away that I would suggest, it is that for an outright home-owner most of your spending is much much more elective than your working self. That’s not dreadfully surprising, because you have more control in how you spend your days. When I was working, I had to fix that damn water pump because otherwise I wasn’t getting to work. Nowadays somebody else can have the problem, and if I were to do it myself I would wait until there wasn’t snow on the ground.

  • 5 The Investor January 26, 2021, 1:50 pm

    @Neverland — Even by your legendary standards that’s an obtuse and irrelevant comment.

    A passive investor invests passively because active investing is a zero sum game. They don’t believe they have an edge in selecting those active managers who will outperform against those who will underperform (one way touted of doing so being past performance, which you rightly but irrelevantly cite here).

    In contrast, someone who is paying £20,000 in school fees that are rising 10% a year faces a different personal inflation rate to someone earning the same salary whose kids are in State school, for example.

    Thanks for reminding us that nobody can predict when a roof may cave in. This was in the article, of course, as usual.

    Further comments from you will be automatically deleted from this thread, to save me the bother of parsing them for sense.

  • 6 ZXSpectrum48k January 26, 2021, 2:00 pm

    This topic doesn’t get anything like enough attention from the FI community.

    I tend to think that much of difficulty is how people mix up the cost of living adjustment (as defined in the formal CPI metric) vs. a more opaque “standard of living” adjustment. Those hedonic adjustments inside CPI metrics can be just impossible to replicate. Yes, the US CPI-U basket implies that $1000 TV you bought in 1995 will only cost $100. Except you can’t buy the CRT TV for $100, and anyway, you now want a nice 65 inch flat-panel. The person retiring at 40 in 1990 didn’t include a PC, the internet or a mobile phone in their cost of living but now at 70 needs all of them.

    It’s notable that no US FI blogs have ever really discussed using say the US Consumer Bundle as the inflator, rather than CPI-U. The consumer bundle is the average value of annual expenditures for consumer units (goods and services) and is expressed in dollars, not corrected for inflation. It could be considered a proxy for the average expenditure for most US families. What is the SWR for a 40-year retirement using the consumer bundle? It’s 2.5%. So that 25x rule just became 40x. Clearly doesn’t fit the narrative people want to sell.

    The UK, by comparison, has one clear “advantage”. Most analyses uses RPI which is a terribly constructed inflation metric. It overstates CPI by around 1%. So some (but probably not all) of the tendency to underestimate is, accidentally, corrected for. Nobody mentions it but perhaps one reason why the SWR in the US is 4% but it’s closer to 3% in the UK might just be nothing more than using differently defined inflators!

    So it’s all very nice talking about asset allocation, reverse equity glidepath rules and all that other fancy stuff but actually once of the biggest sources of uncertainty is what is that damned thing called inflation.

  • 7 Jon January 26, 2021, 2:36 pm

    Interesting. Thankyou.

    How does this principle apply when it comes to debt?
    “Higher inflation reduces debts” has been thrown around a bit by several commentators recently, as they anticipate rising inflation to come this year or next.. But the impact of this may vary not just according to income, and wealth, and spending.. but also on level of debt.
    Is there a calculation of debt ‘deflation’ to counter personal inflation that may make an interesting tab on this hypothetical spreadsheet..?

  • 8 Andrew January 26, 2021, 3:29 pm

    The cynic in me would be surprised if there was anyone out there with a personal inflation rate similar to the official numbers.

    I recall reading a comment recently, when deceptively low (as always seemingly) official inflation figures were announced; which said something along the lines of: “it’s great that inflation is so low, just a shame the cost of living is rising so quickly”.

  • 9 Tyro January 26, 2021, 3:55 pm

    A really useful and interesting post. My annualised rate over the last five years is 5.72%! I’m in deflation. Evidently I need to spend more – as I remind myself at every annual calculation of net worth – but the pandemic has put paid to that over the last 11 months, despite heroic attempts during Eat Out to Help Out.

  • 10 Kraggash January 26, 2021, 5:53 pm

    Shadowstats has a couple of (USA, but I guess same principle applies in UK) of charts showing inflation using older ways of calculating it. If true, may give pause to those who say “house prices are high now, but interest rates were much higher in my day” (due to inflation)….


  • 11 Flashb. January 26, 2021, 7:03 pm

    Based on 5 years of tracking expenditure, my personal rate of inflation (PRI) is:

    2015 – 2019 | 0.45 %
    2015 – 2020 | -16.44%

    With the oddness of 2020 having been mostly unemployed/on a sabbatical since April, 2020 really throws a curveball at my expenditure and PRI. I don’t think I can take 0.45% as gospel though considering I discovered Monevator, Mr Money Mustache and ERE Q3 2017!

    A really interesting exercise though – I’ve been tracking inflation and expenditure on my FI chart but never thought to work out my PRI. I always love an excuse to play with Excel so I’ll definitely be doing some further PIR calculations on my individual expenditure categories.

  • 12 Christof January 26, 2021, 9:44 pm

    >> Changes in the price of bacon are represented by back bacon and gammon: it is assumed that other cuts of bacon will, on average, move in line with these two items<<

    At least you have different cuts of bacon… In Germany we have bacon that has more fat than meat, and bacon that has more meat than fat. In the US I get a variety of applewood smoked bacon. We love pork, but somehow we missed what you can do with bacon.

  • 13 ermine January 27, 2021, 1:11 am

    > But the impact of this may vary not just according to income, and wealth, and spending.. but also on level of debt.

    It’s called a mortgage 😉 Worked very well for my Dad who paid his mortgage off at a younger age on a blue-collar wage than I did though I earned more.

    He got to see inflation at more than 25% p.a. which does wonders for your mortgage, on two critical provisos:
    You stay employed and
    Your pay roughly tracks inflation

    Easier in the more unionised 1970s B.M.T… Having said that, TI is on a winner with that big IO mortgage, so he is the modern wayfinder in this area.

  • 14 Richard January 27, 2021, 7:30 am

    What do you do with the information though? It’s a good academic exercise to understand where you stand, but what next? Increase your risk to try and increase your returns (surely this is already at your tolerance)? Demand a pay rise to keep ahead? Look to stop consuming certain things? The main value I see is understanding whether your nest egg will sustain you (SWR) and at what point you have enough to survive. In which case I would agree with Ermine, calculating your post retirement inflation would be the most useful thing.

  • 15 The Accumulator January 27, 2021, 10:16 am

    @ Richard – I think there’s a number of things you can do, but the most important is knowing you may have an inflation problem that can’t be solved by the usual inflation hedges, even if national inflation is tame.

    In my case, increasing risk isn’t going to solve the issue (even if I could tolerate the risk), and I can’t expect pay rises to deal with it either as I’m about to jump off that train.

    It’s useful to know that conventional wisdom like the 4% rule and ‘increase your investment contributions by inflation’ may not cut it when you really did into your personal numbers.

    I’d rather be alive to my inflation problem now than 5 years into retirement.

    Maybe you do need a lower SWR than you thought, or you can solve it through better product substitution.

    I do estimate my retirement spending now even though I’m not retired, based on my assumptions about how my consumption patterns will change, as sketched by Ermine above.

    That’s why I’m not worried but I do need to keep a grip on food spending. That’s a substantial area of concern for me given there’s a base level I can’t change.

    I think ZX Spectrum raises interesting questions for anyone on the LeanFIRE path to consider about hedonic lifestyle changes that will become the baseline in decades ahead. For example, most of us didn’t think we needed a smartphone 15 years ago. Now we do. Ideally a really good one that we upgrade every couple of years.

    @ flashb – yes, my personal inflation rate will also take a dive once the numbers for 2020-21 are fully in.

    @ Christof – bacon that’s more fat than meat? I like the sound of that!

  • 16 Playing with Fire January 27, 2021, 11:37 am

    I try to track the inflation rate of needs and wants differently. Even when the line is fuzzy (wine is on my list of needs, better wine is a want). The impact of inflation on food or electricity (the product I can buy costing more) feels different to inflation on gold-plated shoelaces and different again to the impact on my spending of choosing to spend more on boots while a cheaper adequate option exists.

    It helps me think about where I could choose to cut spending and where I’d need to continue to spend.

    If I only look at changes in my annual spending, I’d see a decrease over the past 15 years or so. That isn’t my inflation rate, that is me choosing to spend differently. Looking at my annual grocery spending, that’s roughly doubled in the same time. I have to expect that the grocery bill will continue to increase, I’d be setting myself up for trouble if I assumed that my overall spending would reduce in nominal terms forever.

  • 17 Mezzanine January 27, 2021, 12:02 pm

    As well as un-knowable lifestyle increases to account for, there will also be technology-driven lifestyle decreases. Recent examples include the cost of books/film/music, lighting your home, making voice/video calls, using sat nav/mapping technology. YMMV.

    Excluding an unnatural (I hope) 20% expenditure dip in 2020, “employment” related and one-off costs, our household’s personal geometric average inflation rate (GAR) during the six years 2013-2019 is -0.47%!

  • 18 Al Cam January 27, 2021, 12:30 pm

    In all of the above you seem to assume that your basket of goods is largely invariant year to year. This is almost certainly not the case. And even if it were the case, it would be different to that collected for the official statistics.

    IMO, there is a better – and possibly simpler way – to track your personal inflation rate. However, this still requires you to diligently and competently track your spending – which frankly is much easier said than done. For example, I do not know [m]any people who know exactly how they spend cash?

    The method I am thinking of requires you to essentially understand that each inflation calculation comprises a set of weights applied to a set of top-level component inflation indices. The top level inflation components are basically derived from what is known as the classification of individual consumption by purpose, abbreviated to COICOP.
    The method I suggest requires you to calculate your own household weights and apply them to the official top-level inflation components.
    This method requires you to:
    a) track your spending
    b) slice and dice said spending iaw COICOP definitions – this step is key and is far from trivial. The use of “homegrown” categories, as you describe above, does not work.
    c) use your annual spending data (appropriately sliced, diced, etc) to calculate and normalise your unique household “weights”; and then
    d) apply your unique household weights to the official inflation components

  • 19 Al Cam January 27, 2021, 12:35 pm

    P.S. basket of goods not only means what you buy, but where you buy it from and, to some extent, which day you buy it too!

  • 20 Tom-Baker Dr Who January 27, 2021, 12:42 pm

    @ermine – I have a counter example to one of your assumptions: I think I might not be too close to the mean of the distribution, but it is likely that my spending will increase a bit in retirement.
    Commuting – costs almost nothing now (cycle to work the whole way)
    childcare – my adult children are at university now but as you mentioned might need even more help later.
    parasitic costs of working eg the lattes and food grabbed on the go – I take my own lunchbox and coffee in a thermal flask from home.
    Plus, although these are all elective, with more free time in retirement, it’s likely that my wife and I will want to be going to the theatre/restaurants and on holiday more often than now.

  • 21 Tom-Baker Dr Who January 27, 2021, 1:10 pm

    @ZXSpectrum48k – “The person retiring at 40 in 1990 didn’t include a PC, the internet or a mobile phone in their cost of living but now at 70 needs all of them.”
    Indeed, this is more important than most people realise and will happen much faster now than in 1990.
    Even though my ZXSpectrum still works, I’m using a modern desktop PC now most of the time and I will probably need to have access to a quantum computer in the not too distant future.

  • 22 Naeclue January 27, 2021, 1:26 pm

    Good article. For those looking to stop working at a time of their own choosing, keeping a lid on PIR is essential. A neighbour told me a few years ago that he could not afford to retire. His kids have left home, he is a City lawyer and lives in a £5m house, but he runs a large motor yacht, owns an Aston Martin and recently replaced his 3 year old Range Rover with a new one. The ultimate in PIR madness I recall though was many years ago with a work colleague who was really into flying and whose hobby was to travel to eastern Europe somewhere at the weekend to fly Russian built fighter jets. He was trying to convince me that he would save money if he bought his own private jet.

  • 23 The Accumulator January 27, 2021, 2:32 pm

    @ Al Cam – I haven’t assumed there is a fixed basket of goods every year. If you track spending then it’ll pick up the exact basket of goods you purchase.

    Do you track your PIR using the method you suggest?

    Why do you think it is necessary to weight by ‘official inflation components’?

    Those components are simply an attempt to reach an acceptable average that can be applied across a diverse national population.

    By tracking your own spending, and keeping the categories as consistent as possible, you will know your individual inflation rate.

  • 24 iambic January 27, 2021, 2:38 pm

    Fantastic article as always, thank you. Calculating your personal inflation rate sounds like a logical thing to do, but it’s not something that’s ever occurred to me. I’m looking forward to delving into some spreadsheet numbers to understand my own rate & see whether I need to adjust my forecast investments, (or further trim my spending depending on how scary the number is…)

    Not meaning to be a pedant, but I noticed one minor typo that I think you missed – in the section “How to use your personal inflation rate for investing”, under Step 1 you’ve written: “For example, 5% inflation: 1 + 0.5 = 1.05”. I think that should read “1 + 0.05 = 1.05”?

    Anyways, thanks again for explaining another aspect of personal money management so clearly.

  • 25 Factor January 27, 2021, 3:50 pm


    Way off topic but perhaps of interest – had my postal NHS “blue envelope” today.

    Offered online a choice of vaccination centre locations (nearest 12 miles, furthest 80 miles, three others in between), and a choice of date and pre-set time slots for the initial jab and then a choice of date (pre-set at around 12 weeks down the track) and pre-set time slots for the booster. Seems very well organised.

  • 26 Al Cam January 27, 2021, 4:47 pm

    Inflation is a latent variable. That is, you cannot buy an “inflation meter” and plug it in somewhere and measure inflation. This wikipedia page may help, see: https://en.wikipedia.org/wiki/Latent_variable

    The text that starts ” A quantative …” (from investopedia) for how to estimate inflation is also quite useful: https://www.investopedia.com/terms/i/inflation.asp

    In short, inflation is, by definition, dependent on (amongst other things) a mathematical model. So why not use the model that is provided FoC by the ONS and then tailor it towards your own households spending.

    IMO, the ONS inflation model is good. I must admit that I used to be rather sceptical about this and only finally reached this conclusion after some significant verification (and validation) against my own spending data.

    The short answer to your question that begins “Do you ..?” is yes.

  • 27 HariSeldon January 27, 2021, 11:47 pm

    Retiring in my late 40’s in 2007 I was working on a 4% swr, ( 2008/2009 was interesting)

    BofE inflation calculator suggests that my cost of living should be around 40% higher and that’s about right, but portfolio growth has such that I would now only need a 2% drawdown.

    The other thing I have experienced is that spending is very volatile year by year. Plus or minus 50% This years it’s lockdown and down.

    The variability makes calculating a personal inflation rate difficult as the spending pattern changes dramatically.

  • 28 Al Cam January 28, 2021, 12:47 am

    Re: “The other thing ….”

    Over the last decade our (inflation corrected) min to max ratio on an annual basis is around 1:2, whereas on a monthly basis (not necessarily in the same year though) it is around ten times that!

  • 29 Al Cam January 28, 2021, 10:06 am


    Re: “The BBC host an ONS personal inflation rate calculator but it looks defunct.”

    May I suggest that you try and find a copy of the following paper:
    The personal inflation calculator, Matthew Powell and Jim O’Donoghue, Economic & Labour Market Review | Vol 1 | No 1 | January 2007

    This (RPI-based) tool was apparently removed by the ONS some years ago due to lack of interest/use.

    As it happens, this paper heavily influenced my thinking on PIR and contains some nice graphics too!

  • 30 The Accumulator January 28, 2021, 7:33 pm

    @ Al Cam – thank you for the tip, I’ll look it up. I used the ONS calculator at the time and was pretty gutted when they let it drop. I had a funny feeling it probably wasn’t a smash hit.

  • 31 Al Cam January 29, 2021, 11:51 am
  • 32 The Accumulator January 30, 2021, 3:49 pm

    Thanks for taking the trouble, Al Cam. Got it!

  • 33 Al Cam January 30, 2021, 5:21 pm

    No worries.
    There are some other relevant papers in that Review – including one that sounds rather similar to the O’Donoghue, et al paper you mention above.

    Would be interested in your thoughts in due course.

  • 34 Collreg January 31, 2021, 12:31 pm

    The ‘90s retiree wouldn’t have anticipated the need for a computer’ question is an interesting one. A couple of thoughts:

    First, frequency of replacement. Through my formative years we replaced our home PC probably every few years, and each time seemed like a great leap forward in computing power (I guess that’s Moore’s Law for you), but more recently I haven’t bought a new computer since 2010 (though will probably do so this year, albeit the old one would keep going if funds didn’t allow but it is several years post software support). We’ve seen the same trend in smartphones. My point is the first period of a new technology class is marked by frequent significant improvements, followed by a plateau whereby the technology is sufficiently powerful that any further improvements are almost inconsequential to the actual end-user experience (for the amateur consumer at least).

    So yes, retirement budgets need space to account for the unforeseen new consumer products, but they are unlikely to become a millstone around the neck of your retirement budget as long as you don’t get stuck on the treadmill of annual replacements.

    Which brings me on to my second point, to get to early retirement, or even just to be someone who pays extra attention to their personal finances (which probably typifies the average Monevator reader), you are going to be controlling your budget and probably already establish sinking funds to keep up with infrequent expenses. Applying an inflation adjustment to the savings rate for these may be sensible, but is potentially compensated for simply by adjusting replacement frequency as per above (buying 6 months later over a five year replacement cycle is a 10% adjustment etc.)

    Overall an interesting article, I admit I’ve not done the deep dive through my data, but I know I am not budgeting any more for groceries or utilities, nor even dining out etc. than I was a few years ago, and I’ve become better at anticipating and saving for infrequent costs, so I guess it’s just the luxuries I need to keep an eye on while I try to keep Living Like A Grad Student as TI would say.

  • 35 Dividend Power February 12, 2021, 3:19 pm

    I like the concept and I will give this a try. My personal experience is that inflation is always higher than the 2% or so that the CPI quotes.

  • 36 Harps April 5, 2022, 6:26 pm

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