Wyatt Yates Host 00:00 Money doesn't have to be complicated. You can achieve financial independence. This podcast gets to the truth behind the money miss. You here, from your grandma, your broke uncle, the latest social media influencers and the so-called money experts. Welcome to Money Miss with your host, wyatt Yates. 00:24 So I'm gonna change it up a little bit today and we're gonna be talking about something that is in the news currently. It's all over the news. We're hearing all about it. So, rather than looking at a money myth and breaking it down and getting to the truth of it, we're gonna look at something we're all aware of because it's all over the news. It just came out in the last week that inflation just hit a 30-year high. So we're gonna be talking about inflation. So today's gonna be part one of three episodes where we're gonna discuss inflation. So in today's episode, we're gonna talk about how they measure inflation and why what you are experiencing personally might feel different than what you're being told the inflation rate is. And then the second part next week. We're gonna talk about the measurement of inflation and maybe some of its shortcomings, because, like all statistics, it does have shortcomings. And then the part three is gonna be covering whether or not you should be worried about inflation for the long term or in the short term, and how you can invest or use your money to combat high inflation times. So that's gonna be part three. So today we're talking about how it's measured and why it may be feeling different for you. 01:50 So first let's just get to the core of inflation and the definition of inflation. So inflation is the rate at which the value of a currency is falling and consequently the level of prices of goods and services is rising. So when you're experiencing inflation, your dollars not worth as much here in America because goods and services cost more. And deflation would be the opposite, where your dollar can buy more in goods and services. And there's a lot of issues with deflation because if you had deflation then in theory people would not spend their money and it would bring down the economy because I want to spend my money today knowing tomorrow I could get that for cheaper. So there's a lot of issues with deflation that the government and economists try to in the Fed try to make sure we're always experiencing a little bit of inflation and they can manipulate interest rates and markets to have some rising in prices so you don't have that deflationary pressure. But we're talking about inflation here, which just hit a 30 plus year high in the month of October, where CPI, which is the Consumer Price Index, which is the metric that all the news channels are referring to when they say inflation hit a 30 year high. So CPI, consumer Price Index for October 2021 was up 6.2% from October 2020, which was the biggest inflation surge we've seen since the November of 1990 numbers. 03:41 Now some of you may hear 6.2% and think that inflation is either higher or lower than that from what you're experiencing. So let's get into why what you feel prices are doing and how it's affecting your personal budget may feel different or be experiencing something different than what you're hearing in the news. The first thing you have to understand with the CPI the metric that they're talking about in the news, it is an average, so it's not specific to any individuals spending patterns. It's an average. A lot of thought and data goes into it, but it's, in its essence, it is an average and, even so, a weighted average of a basket of goods and services, so it's not specific to any particular person's spending patterns or budget, so that, in its essence, is going to make it not specific to you. 04:40 The second thing you have to understand is the CPI metrics. So the inflation measure you're hearing the news of 6.2% only takes into account urban consumers and workers. So if you live in a rural area, your prices of goods and services aren't taken into account in this statistic. So the US Bureau of Labor Statistics so that's a government organization that calculates this statistic they only look at urban consumers and workers, which is roughly 93% of the population. So if you're in a rural area, it can feel very different than what you're seeing in the news and what the government's reporting, because they're not taking account rural markets. And one of the biggest factors that impacts pricing in rural markets because it's harder to get to you is energy prices, particularly transportation costs in terms of fuel, which that right now is skyrocketing. So you may be experiencing higher inflation in those rural markets than what you're seeing in this urban statistic. So that's number two. 05:59 Now the third reason, which probably has the least effect on why it may be feeling different or what you're experiencing, is different. But it's definitely worth pointing out there is a time lag on what is measured. So the Bureau of Labor Statistics, which is government organization, they do a survey to thousands of consumers in these urban markets. They call it the Consumer Expenditure Survey and, based off responses by individuals and families on what they actually bought in that survey, they develop the makeup of the basket of goods and services that they use to measure this statistic and then they also help them determine how much weight they give to any specific good or service, based off of consumer spending habits. Now, this time lag. For instance, the 2020 and the 2021 CPI measures are based off of CPI data in survey. These surveys done in 2017 and 2018. So it's roughly a three to four year lag. So consumer spending patterns could have changed slightly during that time. It's probably not a drastic change in the last three years, but there definitely are some changes during that time, which is why one of the things that's a little off with this statistic all statistics are imperfect. This is definitely the best measurement of inflation that we have, but even so, it is imperfect at best. 07:46 The fourth reason why what you're experiencing may be different is inflation affects the middle class and poor more than the wealthy. So inflation is based off of consumption, not saving and investing. So consumption is making up a much smaller percentage of a wealthy person's personal budget, because they're mostly investing their money and not spending it on consumption of goods and services. So depending on where you're at in the wealth or income spectrum, you're going to experience inflation differently. So this metric uses roughly 200 categories of goods and services and they kind of group it into eight major groups and then each category is assigned a weight. So all the groups added up and all the categories of goods and services added up equals 100%. Thank you, thank you, so they do. A weighted average so, like food and beverages, is roughly 14, 15% of the total calculation of inflation. So if food and beverages make up roughly 15% of your personal budget, then you're gonna be pretty much spot on in that category. 09:09 Now, food and beverages don't make up even close to 15% of a higher income earner or a more wealthy person, because obviously you're not eating more. Yes, they may be eating more expensive stuff or maybe eating out more, but it doesn't make up as big of a percentage of their budget, so they're not impacted. If food prices go up 10, 15%, they're not impacted as much as somebody that has a lower income and a tighter budget where they're trying to figure out how to pay for their grocery bill. They're obviously gonna be impacted more by higher food prices. So if you are a higher income earner or a wealthy individual, inflation may not feel like it's as high as 6.2%, because the majority of your money is going into saving, investing in fluctuations and consumer prices of goods and services don't impact you as much. The fifth reason why what you're experiencing can feel different than what you're hearing in the news kind of goes off a little bit of number one where it you know number one we pointed out it's an average, so it's not specific to individual spending patterns. So this measure, like I said before, it looks at thousands of goods and services and then it assigns them percentages. So your personal budget and allocation of how you spend your money is most likely different than what is used to calculate this statistic. So I just kind of wanna dive into some examples on where you may be feeling like it's affecting you more. Inflation's higher than what you're hearing in the news, because it very well your individual situation could be impacting you more. 11:00 So I'm gonna start with just the eight main groups that they look at and how much of the total metric is made up of that group. The first group is food and beverages and that's roughly about 15% of the total. So if your household budget is spending 15% of your budget and food and services, you'll be fairly close. But it's gonna depend on how you make it up and we'll get into that. On the second part, the second group is housing, which is about 42% of the total and that's including your utility costs, your water, sewer, your trash services, your rent or your home payment. So that makes up the biggest chunk at 42%. So if your household budget for housing is higher or lower than 42%, it could be off. The third main category is apparel, which that only accounts for a little less than 3% of the total. The fourth category is transportation, which is a little over 16% of the total. The fifth one is medical, and medical makes up about 8 1⁄2% of the total. The sixth one is recreation, which is just under 6%, at like 5.7% of the total. The seventh category or group is education and communication, which is just over 6 1⁄2% of the total, and then they have their other or miscellaneous at roughly 3% of the total. So if your personal budget by those main groups is different, you're gonna have a different result in what you're experiencing. 12:41 And let's break it down into some specifics here. Some of the largest increases in October in the inflation metric were energy prices. So you've all seen it at the gas pump, motor fuel increased almost 50% 49.6% increase in gas prices in the last 12 months. Now how much weight does the do those gas prices have into this calculation of the six point two percent? Gas prices affected are only 3.9 percent of the total. So if you are a commuter in your low income and you're spending a big chunk of your personal budget on fuel for your vehicle, it's probably way more than three point nine percent of your total budget, which is all that is affecting in this metric. So that's where you could be way off and you could be really feeling the inflation crunch, because Fuel prices are up almost fifty percent in the last year and it makes up way more than the three point nine percent of your budget that it is only accounting for in this stat. 13:58 Another area that a lot of people are feeling the impact of price increases, especially in rural markets, which this Doesn't account for rural markets, but a main way people in rural markets are heating their homes is propane or firewood, and propane and firewood has increased almost 35 percent in the last year. So if that's the main way you're heating your home. That could definitely have a big impact, because Propane and firewood prices only go into account for point zero, six, nine percent. So not even a tenth of a percent, barely over a half of a tenth of a percent. Those prices affect this metric. So if you're heating your home that way, you may be feeling more of a pain with inflation and the price increases there. Then how this metrics calculated? 14:51 Another area that's seen large increases in the last year is at the grocery store. So I Mentioned previously, food makes up 14 15 percent of the metric and Food overall has increased five point three percent, which is less than the six point two percent average. But when you look at different areas in the food Category, there are some areas where there's large increases, particularly on the side of meats. Now meats Are only weighted a little over one percent in terms of the total calculation, so it's not really affecting the total calculation much. But if your personal budget is different than you know, you spend more than one percent of your personal budget on meat. You're feeling a higher pressure from inflation because Meat as an overall category has gone up 14 and a half percent in the last year. Beef Specifically is anywhere from 20 to 25 percent, depending on the category of beef. So if your budget for meat is more than One point one percent which is all that this statistic says your budget would be, because it's using averages You're gonna feel that inflation pressure a lot more than somebody that maybe doesn't eat meat. 16:12 Now, there's a lot of categories here. It's about six pages long as far as the 200 categories with all their prices, and you can get all this information from the Bureau labor statistics website. But you'll notice when you're going through these six pages that there's a lot of Things that you probably don't even have in your budget because you don't spend money on them. So those aren't gonna apply to you, like education, if you're not going to college, the fact that college tuition and fees only increased 1.8 percent during this time period doesn't impact you that much, and tuition and school fees on account for about 3 percent of the total and in Education as a total makes up over six percent of this calculation and it definitely pulled it down in terms of what the overall measure was, because education and communication services Only increased 1.7 percent during this time period. So if you don't have anything budgeted for that, that's probably that's actually pulling the inflation number down, then you might be feeling it higher or if a lot of your money spent towards that, maybe you don't feel like it's as high as 6.2 percent. 17:25 You know there's other categories like they factor in new car prices and used car prices. If you're not on the market for a new or used car and it's not in your budget for the year, those prices don't really impact you and During this period new car prices increased almost 10 percent, used car prices increased 26 percent and new car prices Make up 3.8 percent of the total of this calculation and used car prices make up 3.3 percent. So right there you have Over 7 percent of the totals based off of new and used car prices, which, if you're not buying a new or used car, it doesn't affect you. So your spending habits and patterns impact the inflation you're personally feeling in your household. It's not what you're reading on the news of 6.2%. You could either be experiencing higher or lower depending on your spending patterns. 18:25 This metric is simply a way to measure inflation. It is the best metric that we've come up with. You know all the great economists and people in the government have put a lot of time I mean it's a very complicated computation on how they do this and they take a lot of data in to be able to generate this, but it is a simple overall measure and it's not specific to what you may be feeling, and different parts of the country can be experiencing different rates of inflation pressures as well. So it's the best we have. It's imperfect, but it is the best we have, so that's what we use. Now, if you wanted to figure out like what you were experiencing, you could go through and say okay, my personal budget, based off of these categories, is X, percentage to weight it towards yours, and you could probably calculate what you're experiencing personally if you wanted to do that, because your situation is different than an average of this. So I'm just going to quickly summarize the episode just for a refresher for you. 19:35 So inflation in terms of the consumer price index, which is the CPI that is calculated by the US Bureau of Labor Statistics, reached a 30 year high in October of 2021 of 6.2%. So it's the highest rate that's been calculated in the last 30 years. Now, depending on your situation, it may feel like it's much higher than that, or inflation may feel like it's much lower than that because the statistic is an average. It's not specific to your individual spending patterns and it is only using data from urban centers, so only urban consumers and workers are calculated into this Rural areas and their data is not used in the calculation of the statistic. There's also a time lag between how they determine spending patterns and what weights they're going to give to different goods and services in the calculation, to when they actually incorporate it into the CPI, and that's roughly three years time lag between that. 20:50 And the fourth reason why it feels different for you is because, depending on where you're at in the income spectrum, inflation affects you differently. The wealthier you are, the higher income earner you are, it's going to impact you less because more of your money in your personal budget is going towards saving and investing and less of your spending is spent on consumer goods and services. So the middle class in the poorer populations are definitely impacted by inflation more and they can feel the burden of inflation way more, especially when there's not real wage growth, which we're not experiencing that right now. Wages aren't growing as fast as inflation is, so those populations are getting kind of a double hit. And the last reason goes off with kind of the first, where your spending patterns are going to be different than what they're using in terms of averages. So your household budget and the makeup of that budget by category is going to be different. Food and beverages may only make up 10% of your budget, wherein here they're assuming it makes up 15%, or maybe it makes up 30% of your budget, so you're impacted by those price increases more. Or maybe gas prices make up 15% 20% of your budget, because you don't have a high income and you're commuting a lot. So it really depends on your makeup and if your makeup, if you're weighted more in areas that are experiencing higher inflation, you're going to feel like inflation is much higher than what this metric is telling you. So chances are what you're experiencing personally or as your family is definitely different than what you're seeing in the news, and it may be higher or lower. It depends on your situation. 22:42 This metric isn't designed for calculating your specific situation. It's a broad measure of pricing and the best that they've come up with so far. They're always trying to figure out how to make it better, but it's what we got and it's not going to be specific to you, so that's what you have to understand when you see this. This gives you a rough idea broadly. Now there are definitely some big issues with this calculation that we didn't get into today. That we will get into in part two, specifically housing and how they calculate housing increases, which anybody about in every market in the US right now is experiencing big increases in rent rates If you're a renter and home prices have gone through the roof and this measure does not account for that correctly and we will get into that in part two. 23:41 But this is a good introduction into how this metric is determined and how they're doing it and why it can feel different to you. So in part two next week we're going to look at some of the imperfections with this measure, which all statistics have imperfections in them. This one, definitely with housing, is a big issue I have with it, and then in part three we're going to dive into in a couple weeks. We'll dive into should you be concerned with this it's all over the news, it's getting a lot of attention what are our risks in the short term, what are our risks in the long term? 24:21 Specific here in the US, and how you can invest your money or what you should be doing with your money to combat high inflation, and we'll get into that in part three, but next week we're going to cover some of them perfections in this metric and what they're missing. So stay tuned for that and I hope this episode kind of informed you, gave you a little bit better understanding of inflation and why it can feel different to you than what you're hearing in the news, because for many Americans right now it definitely feels like it's much higher than what they're hearing in the news, just based off of how you're spending habits are and where your large budget items are. But this is the best we got and it's not designed to measure your specific situation. It's a good metric and it's something that we should continue to look at in terms of economists and making policy decisions and stuff. But it's imperfect at best. But it's the best we got. So thanks for listening and look forward to diving more into this inflation topic in the next two parts. So stay tuned. 25:33 For those Want to achieve financial independence, go to ruggedfinancialcom where you can download my free PDF of the 12 Things to Do to Win With Money, and you can also sign up for my weekly money tips emails where I cover the same tips and tricks and advice I walk all my clients through so you can begin your journey to financial independence. Thank you for watching and listening to this episode of the Money Myths podcast. Please do me a favor and, if you found this episode interesting, subscribe to the podcast so you can make sure you get all the future episodes. Also, leave a rating and review so you can help us grow this podcast so we can leave more people to financial independence. And, lastly, please take a screenshot of the episode, share it on your social media channels and tag us using at ruggedfinancial. We will see you later.