Inflation is one of the assumptions that our FIRE financial model is the most sensitive to. Even a half percent change in inflation over a 40 year retirement plan is hugely significant. We use an assumption that our spending inflation will be between 2.5-3.0% a year, which is slightly higher than what the official US Consumer Price Index (CPI) has averaged.
I’ve read articles in the past about inaccuracies in the official CPI. That the Federal government doesn’t account for all sources of inflation, that healthcare costs (which are more important to retirees) are higher than CPI, or that the CPI doesn’t account for improvements in the functionality of technologies. It has always made me wonder if things were being measured the right way.
Recently I came across a new CPI tracking tool called the ‘Chapwood Index’. The Chapwood analysts claim to reflect “the true cost-of-living increase in America” by tracking the “unadjusted actual cost and price fluctuation of the top 500 items on which Americans spend their after-tax dollars in the 50 largest cities in the nation.”
The bad news is they reveal much, much higher inflation than the official CPI. How high? For many cities, including Minneapolis where we live, they show an average 9.9% annual inflation rate over the last five years, which is close to 5x what the government has been projecting.
The Chapwood Index includes all of the most expensive purchases we make, like real estate, health insurance, and vehicles. It also includes everyday expenses like gasoline, groceries, and apparel. The list even includes a few unusual things that they list as typical for a middle-class American household, but I’m not so sure about: country club memberships, luxury box rentals, and first-class airfare. You can see the full list of 500 items HERE.
Their approach seems reasonable in concept, but I’m questioning its conclusions. I feel like I would have noticed a lot more pain in our checkbook if costs were really going up this fast. After all, nearly 10% inflation means that prices should be doubling about every 7 years. That’s fast!
What’s your assessment of the Chapwood Index and your own estimate of how fast consumer prices are rising annually?
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MrFireStation 
While I agree the government CPI is not prefect I am not sure this one is any better. They have a lot on the list that would be price sensitive in my view. Many items would not be on my shopping list if I was trying to stay on a budget and inflation was rising. I also question the motives of the authors being an investment company they like to scare people in needing to save more so their commissions/profits are higher. I would much rather see an independent source. I have noticed the food prices going up, and while we have the ability to shop at other stores or adjust our eating. The real test was during this covid thing when supplies were not available at any price. Luckily that was just for a short time and the stores are now fully restocked and the government stepped in to make sure stores were not price gouging. But I have seen that prices are still not as competitive as they once were. Covid inflation is also real with the rising expenses of businesses having to pay for safety measures being passed on to the customer. I also expect the taxes will have to rise to help pay for all the government assistance handed out.
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It will be very interesting to see how the government responds to ‘solving’ the deficit after the November election. Spending never came down after the Great Recession stimulus spending and neither candidate is talking much about their plans to address.
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