Your Personal Inflation Rate – How We Did It27 Feb 2015
Inflation – the rate of increase in prices for goods and services – is one of the most important concepts in economics.
It drives decisions by Central Banks on interest rates that impact our borrowings and savings, as well more adventurous polices such as quantitative easing. Periods of hyperinflation can lead to panic-buying and the undermining of currency as a means of exchange. Periods of deflation – when the rate of price growth is negative – can delay consumption and investment decisions, which in turn damages economic output. Inflation can either eat away at the value of our savings and pensions, or it can increase the relative future burden of our debt.
Inflation doesn’t just have broad macroeconomic implications. It also affects each one of us personally. When our wages fail to grow in line with price inflation, we can feel it as our living standards are undermined. What €100 would have bought is reduced, and the cost of living grows higher.
Inflation in Ireland is calculated based on changes in the Consumer Price Index. This is a basket of hundreds of goods and services, supposed to representative of our national spending patterns. We created “My Personal Inflation Calculator” because this basket represents average spending across all households, meaning it doesn’t look like the expenditure pattern of any given individual household.
- For example, the Consumer Price Index includes mortgage interest payments and rents, whereas most households will only pay one or the other.
- Other items such as car maintenance, tobacco, alcohol or third level fees are relevant for some households, but may not be relevant for yours.
For the first time in Ireland, “My Personal Inflation Calculator” calculates an inflation rate that is relevant for you, based on your answers to a few simple questions about your spending patterns.
Why is my inflation rate different from the national inflation rate?
The prices of different goods and services rise and fall at different rates, meaning two households with different consumption patterns will face different inflation rates. The impact on inflation of a price change in any given good or service depends on its relative importance in the household budget.
One of the most important areas of household expenditure is the money we pay to live in our own home, and the costs of different tenancy options have experienced divergent fortunes in the last number of years. For instance, the price charged by landlords for rented accommodation has been increasing significantly above the overall rate of inflation, whereas mortgage-holders have benefited from smaller repayments as interest rates have fallen. This means that the inflation rate facing renters is higher than the rate mortgage-holders face.
Annual Price Inflation of Tenancy Options
Other consumers that have been hit by above-inflation price increases include smokers, drinkers, third-level students and those with health insurance. Meanwhile, car owners have benefited greatly from falling fuel prices.
A note on accuracy:
My Personal Inflation Calculator” provides an approximation of your household inflation rate. To get a truly accurate picture of household inflation, the calculator would need to know where you shop, what you buy, and exactly how much you paid for each item. Even if you had this level of information to hand and were willing to share it, the level of complexity would make very difficult to use. Instead, we ask simple, high level questions that will allow us to calculate a price index that better matches your experience.
The eight questions we ask reflect the consumption choices that have relatively large impacts on the inflation rate. Asking more questions would improve accuracy, but there are diminishing returns to each additional question.
Whether or not your household buys pasta will affect your personal inflation rate to some extent, but the difference is so small that the question is not worth considering
Finally, it should be noted the calculations we perform are based on published CSO Index values that are correct to one decimal place only. There may be small differences between the inflation rate as calculated by us and comparable indices produced by the CSO, who use eight decimal places in their calculations.