We all know that inflation will affect our long-term financial plans, particularly with regard to retirement budgets. No, you usually won’t notice much change in prices from one year to the next, but over a 20-year retirement inflation could gradually double the prices of things like housing, food, medical care, gas, and services.
That’s why we watch the Consumer Price Index (CPI), and its reports of annual inflation. Inflation has varied considerably from year to year in recent history, ranging from relatively modest levels to the multi-decade highs seen in 2021–2022. But it’s important to keep in mind that the CPI calculates the average inflation rate by measuring the prices of 2,000 different goods and services. Therefore, average inflation rates might not mean as much to you, as the prices of things you actually use on a regular basis.
To illustrate what we mean, categories like groceries, gas, healthcare, and housing routinely post very different year-over-year price changes than the headline inflation number — sometimes several percentage points higher or lower. (For a current breakdown, the Bureau of Labor Statistics publishes category-level CPI data monthly at bls.gov.)
As you can see, the overall rate of inflation might differ quite a bit from the price changes in individual categories. So, inflation might impact you more or less than the average person, depending upon how you tend to spend your budget.
For example, once you’re retired, you might spend a lot more on healthcare. When prices of healthcare jump dramatically, your budget will be more affected. If you’re helping adult children with college expenses, tuition increases will affect you more. On the other hand, you’re no longer commuting to work, so hopefully your gas expenditures will decrease.
The point is, remember not to think of inflation as an overall change in prices over time, but look closely at your own budget and how individual categories might affect your budget throughout retirement. Call us to discuss your retirement income plan, and we can help you identify ways to manage the expenses that will impact you the most.
For current inflation data by category, visit bls.gov.