DO YOU KNOW WHAT YOUR CPI IS? The federal government announced in mid-January that consumer prices, as measured by the Consumer Price Index, rose 3.3 percent in 2004—the highest increase since 2000. But do you know what your personal inflation rate was for 2004? Or why itÕs important to gauge how much it rose? Or what you can do about it? The CPI is a measure calculated by the U.S. Bureau of Labor Statistics of the average change in prices paid by urban consumers for a fixed market basket of goods and services. The measure is taken monthly, then annualized for the previous 12 months. ThereÕs been much debate about how the CPI is calculated and whether it accurately reflects true price changes. Regardless, itÕs a widely used number. Social Security uses it to adjust benefit payments to retirees, itÕs a bargaining chip in wage negotiations, and the Federal Reserve uses it as one of many indicators in deciding whether to raise or lower interest rates (lately, the Fed has been raising interest rates in order to ward off more serious inflation). But what does the national CPI say about your personal cost of living? Probably not a lot. Take, for example, three major expenses for many families: housing, medical care, and college. Some critics say the national CPI underestimates the impact of these expenses. But beyond that, your personal CPI may differ dramatically from the national CPI depending on where you live and how much these three expenses figure into your cost of living. According to the National Association of Realtors (March 2005), the national median existing-home price rose 8.8 percent in 2004. And in nearly half of 129 metropolitan areas surveyed, home prices rose in double-digit figures, including a 47 percent increase in Las Vegas and better than 30 percent increases in certain markets in California and Florida. Yet in some regions, prices barely budged. Even within a specific market, price increases can vary depending on the price range of the type of house youÕre looking for. While the national CPIÕs medical-care component rose only 4.2 percent in 2004, the reality for many people is that the cost of medical care rose dramatically faster. This is especially true for older people who typically spend much more on health care than the average person. Families with children in college also will have a different—typically higher—personal CPI than families who donÕt have children in college. The Òeducation and communicationÓ component of the national CPI showed a mere 1.5 percent increase. Yet the average increase for the cost of tuition for in-state students at four-year public colleges for the 2004–2005 school year rose 10.5 percent, according to the College Board. That came on the heels of a 13 percent rise the year before. All of this illustrates that your personal consumer price index may be quite different from the national CPI, and you need to plan your finances accordingly. In some cases, personal CPIs may be lower than the national average, but for others it will be higher. What can you do with your own CPI? Plan for it. When calculating your budget or perhaps future retirement needs, be sure to take into account your inflation rate. Trim high inflation areas. You may have the flexibility to trim expenses in some areas. If necessary, you can send your child to a less expensive college or you can buy a less expensive home. ItÕs more difficult for some expenses such as medical care, though one can possibly make savings there, too. Review your investments. A diversified portfolio can go a long way toward helping combat inflation though it cannot ensure a profit or protect against a loss. Assuming you have ample investment time ahead—say at least five to ten years—you should consider investments that have a history of outpacing the rate of inflation, though past performance is not a guarantee of future results. Investment advice is provided through The Planners Network, Inc. (ÒTPNÓ) and securities offered through National Planning Corporation (ÒNPCÓ), Member FINRA/SIPC.  Terry P. Welsh and Duncan Frazier are advisory affiliates of TPN.  Terry P. Welsh and Duncan Frazier are registered representatives of NPC.  Alaska Financial Associates, TPN and NPC are separate and unrelated entities. This article was produced by the Consumer Affairs Dept. of The Financial Planning Association and provided to you courtesy of Terry P. Welsh, CFP, Ketchikan, Alaska. If you have any questions or concerns regarding this, or any other financial topic, please call me at 1-907-225-0619, or click on the "CONTACT US" button to arrange for a free initial consultation. Back To Newsletter Archive This document contains forward-looking statements, which are based on our expectations and are subject to various business risks and uncertainties that are beyond our control. Actual results could differ materially from these forward-looking statements as a result of such risks. There can be no assurances that the forward-looking statements contained herein will in fact transpire or prove to be accurate. Securities offered through NPC are not FDIC-insured deposits, obligations of, or guaranteed by any bank or credit union, and are subject to investment risk, including the possible loss of principal amount invested.  Selected indexes have been provided solely for informational purposes and graphs alone should not be the basis of investment decisions.  Other indexes may exist which are more applicable to the clientÕs portfolio.  Past performance does not guarantee future results, and there is no assurance that a given trend will continue. [Privacy Policy] [Home] [Company Overview] [Get More Info] [Contact Us] [Newsletter] [Links] [QuoteStream] Copyright 1998 - 2002 by AFA and other contributors