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What is your personal inflation rate?

Bermuda has one of highest per capita gross domestic product* numbers in the world. It is a laudable achievement of Bermuda's international financial reputation.

There is a downside to that statistic, however. We all know what it is — the cost of living in Bermuda.

In May 2016, the Bermuda Department of Statistics reported that while consumers paid 1 per cent more for the CPI basket of goods and services than they did a year ago, inflation had dropped. This is scant consolation for real people and their families' managing households, putting nutritious food on the table, footing an increased share of healthcare responsibility, keeping utility costs controlled and the like, while wages for many have remained stagnant.

So, This week we will focus on your current income and spending patterns with projected expense increases / decreases down the road. Why do this? We have to figure out your personal inflation rate (that may not be anywhere near the economy inflation rate) in order to assess its future impact on your income and savings. This calculation is an important part of your retirement planning process.

For years, my estimates of Bermuda general living expenses — based upon client reports and first-hand experience — trended in the 4 per cent to 6 per cent annual inflation rate range. I think now that the estimate should be increased. We know that rate increases (September 2015) for HIP and Future Care tallied up 11 per cent to 12 per cent.

Readers, you can provide real feedback on how what it is costing your family currently for food, utilities, gas, education, healthcare, etc and whether you feel these prices have increased significantly since one or two years ago. Write to me anonymously as always.

Economic changes in the US, Canada, UK and Europe impact the Bermuda economy twice over: foreign-country inflation pressures the general price of goods and services while currency swings upward may increase prices, decreases in the value of the loonie, for instance, can be delightfully positive if the savings are passed on.

Bermuda's residents have to adjust for the impact of currency fluctuations on not one, not two, not three but four major currencies: the euro, sterling, Canadian and US dollars, an effect that may be more muted in a very large economy.

Understanding gross domestic product and economic inflation numbers is the purview of economists and financial analysts. The average resident, who is in neither of those two high-influence groups, knows the true basics of economic theory. Living here is very, and unavoidably for many necessities, expensive.

An astute summation of the Bermuda shopper mindset that has been conditioned and developed over the years, unfortunately negates trying to control personal purchasing power. “Don't look at the price. Ask yourself, do you want it? If you do, buy it now. If you don't buy it now, it won't be there when you change your mind.”

Not exactly the best way to manage a family budget. As with any business (and running a family budget is a business) there are always two stark choices: trim your expenses by the inflation rate and/or grow your revenue. This cost-containment philosophy works best as long as you:

• Have a job in a growing industry.

• Have a job that provides incremental raises above the rate of inflation.

• Have a job that assists you in boosting your education and work skills upward.

• Can control price increases in all of your expenses by buying less of, a challenge in a growing economy.

Take away any of those factors and inflation creep erodes your purchasing dollar every single day.

Inflation is often quoted in average broad terms as to how it impacts a population as a whole. It generally doesn't break down the real monetary cost of purchasing goods and services to a personal level.

A personal inflation calculator makes the cost of getting by very real by calculating personal family expenses and comparing that percentage inflator to the overall combined income level of the wage earners in the family.

Personal inflation calculator: here's how it works. If you are so inclined you can brush up on your maths skills and use the illustrated calculator chart. Write to me for the Excel version!

Step one: list your estimated food, utility, transportation, health insurance and care, housing costs, repairs, etc on a monthly basis.

Step two: estimate each of these cost categories in percentage terms by dividing each of them by your monthly total expense cost.

Step three: now multiply each category percentage by your estimate (or ours) of the increase in percentage in each of these costs due to inflation. Health insurance, for instance, has risen between 9 per cent and 11 per cent.

Complicated, too much like the homework that you hated as a teenager? You are correct! So, we'll do the computations for you.

In this hypothetical example, the total family earns a modest salary, but inflation knows no sympathy, impacting them nevertheless. And as you can see, the personal inflation rate is far above the Bermuda inflation rate. We are all impacted by inflation, but those working so very hard to make it up the financial success ladder are impacted far more.

The inflation effect is an indiscriminate discriminator, which cannot be eliminated with planning, to any family.

When financial survival is contingent upon employment success, how can anyone have the time or the energy to consider budgeting / increasing income strategies to minimise the effect of one's shrinking dollars. For once, I don't have an answer.

The Bermuda Personal Inflation Calculator original article / chart was written by me in 2001. It has been revised and updated to reflect our current environment.

* Bermuda GDP is the monetary value of all the finished goods and services produced within a country's borders in a specific time period. GDP is one of the primary indicators used to gauge the health of a country's economy, according to Investopedia.

Next week: We have our personal inflation calculator filled in, now how do we use it with our retirement projection calculations.

Martha Harris Myron CPA CFP JSM: Masters of Law — International Tax and Financial Services; Pondstraddler Life™ financial perspectives for Bermuda islanders with multinational families and international connections on the Great Atlantic Pond

Contact: martha@pondstraddler.com

Price-rise challenge: an example of how to work out the impact of inflation on you and your family

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Published June 11, 2016 at 9:00 am (Updated June 10, 2016 at 8:40 pm)

What is your personal inflation rate?

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