India’s consumer price inflation rate in May was 2.18 percent. This is the lowest it has been in over 5 years. For you though, does it feel like less? If you are like most people, with each increment you got, your expenses also went up. Inflation for you probably feels a lot higher than what comes on the news.
The question is why?
The reason why inflation feels a lot more, than what the government says it is, is your lifestyle
Do you spend the same way you used to 5 years ago?
Most probably not. Our lifestyle tends to change much faster than the prevailing inflation rate. You, therefore, have a “personal inflation rate” that you need to add to general inflation.
You might have also heard of something called lifestyle creep. It’s the main reason why your annual increments feel a lot less than they should. As your income grows so do your lifestyle costs.
How fast these costs grow to depend on your habits and inclinations. If your income grew from 2 lakhs to 6 lakhs in the last 3 years and if your expenses grew from 1.5 lakh to 3 lakhs then while your income grew 3x your expenses grew by 2x, and thus your lifestyle creep isn’t as much. If the numbers were the other way around then your lifestyle creep is much higher.
So how should you look at inflation?
A smart way to look at inflation is to see personal inflation as a sum of price inflation and lifestyle creep or lifestyle inflation.
Price inflation doesn’t consider a lot of costs that might be part of our daily lives. For example, the app-based cab service you might be using to commute. These costs form a major part of lifestyle costs and thus adding lifestyle inflation to price inflation gives you a much more realistic picture of inflation as it affects you.
So now that you know why inflation feels more than it is, you might be wondering what you can do about it?
You can’t control price inflation but you can control lifestyle inflation
Lifestyle inflation is largely under your control. You can choose by what factor it goes up. A good thumb rule is to simply keep your lifestyle cost growth lower than your income growth. By how much, you might ask.
It’s simple, if you can save over 20% of your monthly income then you are most probably keeping your lifestyle inflation well behind your income growth, under most conditions.
So the next time you read reports of inflation going up or down, you know what it all really means for you.