You will be able to explain why your own cost of living can rise faster or slower than the published index.
The news says inflation last year was modest. Your landlord has just put the rent up by a tenth, your childcare centre sent a letter about new fees, and your weekly supermarket run costs noticeably more than it did. It is hard not to feel that the official number was measured somewhere else. In a sense it was. It was measured on an average household, and you are not one.
This lesson explains why your own cost of living can rise faster or slower than the headline figure, and how to get a rough sense of your own rate.
The Consumer Price Index from the Department of Statistics, which you met in lesson 4.1, Inflation means the same dollar buys less each year, does not track every price equally. It tracks a basket of goods and services, and each category in the basket carries a weight: its share of total spending by households in Singapore. The weights come from surveys of what households actually spend their money on.
Say food took up a fifth of the average household's spending. Food prices would then count for a fifth of the index. A rise in food prices pushes the index up a lot. A rise in the price of something few people buy barely moves it.
That is a sensible way to build an average. It also means the index describes a household that spends in average proportions on average things. No real household does.
Think about how spending changes with life stage. Someone renting a room or a whole flat spends a large share of income on rent. Someone living in a fully paid HDB flat spends far less on housing. A car owner carries loan instalments, parking, petrol and insurance that a person who takes the MRT does not. A household with a toddler spends on infant care and diapers; a household of retirees spends more on health care.
Each of these people has a different basket, so the same set of price changes hits them differently. When rents climb, the renter's cost of living rises much faster than the headline, while the homeowner barely feels it. When car prices and running costs rise, the driver feels it and the MRT commuter does not. The Department of Statistics recognises this and also publishes CPI figures for households at different income levels, which often differ from the headline.
Your personal inflation rate is driven by the prices in the categories that take the biggest share of your spending. A large rise in a small category hardly matters. A modest rise in your largest category matters a lot.
Here is a worked example with figures made up for the purpose. Mei is 29 and rents a room. Out of her monthly spending, 40% goes on rent, 30% on food, 15% on transport and 15% on everything else. Over the past year, say her rent rose 6%, food prices 3%, transport 1% and everything else 2%.
To find her personal rate, multiply each category's share by its price rise and add them up. Rent contributes 40% of 6%, which is 2.4 percentage points. Food contributes 30% of 3%, which is 0.9. Transport contributes 15% of 1%, which is 0.15. Everything else contributes 15% of 2%, which is 0.3. Added together, that comes to 3.75%.
If the headline figure that year were 2.5%, Mei's own cost of living rose about one and a half times as fast. Most of the difference came from one line: rent. Her landlord, who owns the flat outright, would have a very different number.
You do not need to build your own index to make use of this. The practical approach has two steps. Use the published figure as your reference, because it is official, regularly updated and good enough for many purposes. Then adjust it up or down in your head, depending on whether your biggest spending categories have been rising faster or slower than average.
The Department of Statistics publishes price changes by category, so you can see whether food, housing, transport or health care moved more than the index as a whole. When you work out the real return on your savings, as in lesson 4.2, Real return is roughly the nominal return minus inflation, a renter in a year of rising rents might reasonably use a higher inflation figure than the headline.
The first step in all of this is knowing where your own money goes. Your bank and card statements from the past few months will show you, once you sort the spending into a handful of groups and see which ones are biggest.
List your five biggest spending categories and note whether prices in each have risen faster or slower than the headline figure in the past year.
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