Your Real Cost of Living

Few people strive to be just average. But when it comes to inflation, some folks would jump at the chance. In late 2007, consumer prices were up an average of 2.8% nationwide over the preceding 12 months. That's not much. So why is it so painful every time you go to the grocery store? Probably it's because your personal consumer price index diverges from the national average.

For starters, you're not national. Like real estate, most shopping is local and prices vary by region. For instance, the cost of living in Houston and Galveston is flat compared with a year ago. But across the Gulf of Mexico in the Miami-Fort Lauderdale area, prices are up almost 4%.

Nor can you possibly be average, statistically. That's because the official consumer price index reflects an array of households simultaneously. Both renters and homeowners figure in the overall cost of housing, both drinkers and teetotalers in the cost of food and beverages, both the sick and the healthy in the cost of medical care.

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Furthermore, the feds use extensive surveys to weight the importance of items in their CPI basket of consumer goods. Spend more than average on items whose prices are rising faster than average, and your personal inflation rate could soar.

For example, we'll make an educated guess that your personal inflation rate is well above average if you have a son or daughter in college. For one thing, the CPI assumes that only about 3% of spending goes to education. For another, college-cost inflation has been running around 5% to 8% a year, more than double the average inflation rate in recent years. The double whammy of devoting a bigger-than-average share of your spending to an expense that is rising at an above-average pace could push your personal inflation rate into double digits.

Critics say bureaucrats understate the CPI by assuming shoppers will sub cheaper items for pricier ones, and by adjusting price hikes downward to reflect quality improvements in what we buy.

Food for thought. When you get right down to it, not even the average is average. Food and beverage prices are rising at a 4.4% annual rate. But dairy prices are up 13% (and 26% for a gallon of whole milk alone), thanks to price supports and brisk exports of powdered milk.

Meanwhile, meat prices are up 6%, and bakery products are up 4.6% because corn is being converted into ethanol instead of animal feed, muffins and sweetener. "We haven't seen an increase of this magnitude in grocery prices since 1990," says Bureau of Labor Statistics economist Patrick Jackman.

The news isn't all bad. Apparel prices are falling. Ladies, your clothes are about 3% cheaper than they were a year ago. Technology prices are down nearly 15%; computers are down 10%. Couch potatoes, rejoice: TV markdowns are running 25%.

Ways to save. Still, if you're buying groceries and gas more often than flat-screen TVs, you'll feel the pinch. Fortunately, you can fight some trends. Buying gas with a credit card that rebates part of the cost will lessen the sting of a 9% hike in prices since late 2006; Kiplinger's likes the BP Rewards Visa (see "The 2007 Best List").

With the cost of health insurance up nearly 12%, shedding pounds or chucking cigarettes may yield financial rewards. Your boss -- like 48% of those surveyed by Hewitt Associates -- may cut you a break on premiums if you take a health-risk appraisal or pledge to live healthier.

Got kids in college? This semester, don't buy textbooks. Rent them instead from discounters such as BookRenter.com or Chegg.com. Textbook prices are up 9% from a year ago, so shaving your tab there might get you a little closer to "average."