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By Jason Stipp | 07-19-2011 04:46 PM

Know Your Own Inflation Rate

Morningstar's Christine Benz outlines how to gauge your own personal susceptibility to inflation in order to formulate a more customized strategy for outpacing higher costs.

Jason Stipp: I am Jason Stipp for Morningstar. Although the government releases its official inflation data every month, and that data has been within, what they call an acceptable range, a lot of consumers, especially retired consumers and investors, seem to have a different sense of how hot inflation has gotten recently.

Here with me to talk about that disconnect and how to customize the actual inflation to your individual situation is Morningstar's Christine Benz, director of personal finance.

Thanks for joining me, Christine.

Christine Benz: Jason, great to be here.

Stipp: So, the Federal Reserve does say that the official inflation rate, the CPI, is within an acceptable range, yet when you look at some of the costs out there at the gas pump and the grocery store, it feels like there is some sort of disconnect. Why is it that the official rate seems to be lower than what we're actually feeling out there?

Benz: Well, a couple of things, Jason. First of all, the Fed considers the core inflation rate. So excluding those food and energy cost that we all have to pay for when it's looking at inflation targets, but the other thing--and this is an important concept that Jason Zweig has highlighted in his Wall Street Journal column--is, this concept called "Meflation."

So, really our individual inflation rate is going to vary depending on what kind of stuff we're buying and what our main household expenses are. So, for some people, inflation may seem relatively high. So if it's a senior, for example, where those food and energy costs are a very high proportion of their total household outlay, inflation will be much higher for them than for households where those costs aren't as big a percentage. So, it really is something that you have to customize and think about that personalized basket of goods and services that you are buying.

Stipp: So, let's talk about some of those swing factors and what can cause your Meflation, as Zweig would say, to be higher or lower. The first one that we will talk about is location, where you live. How does that affect the inflation?

Benz: Well, a big one is if you have a fixed rate mortgage or if you're retired and your home is already paid for. That's a good thing because you won't experience those household housing costs fluctuating to the extent that would happen if you had an adjustable rate mortgage and were paying rent. So that's a good thing if you've got those costs locked down.

But you might also see your housing costs vary from one region of the country to another. So, for someone who is living in an area that's on an economic upturn, so maybe the D.C. area or the Bay Area right now, folks like that who are paying rent will tend to be confronting higher housing-related costs than people who are in more economically stable or even depressed areas.

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