Improving Investor Behavior: Your personal economy

On Aug. 10, the U.S. Bureau of Labor Statistics released updated inflation numbers. While the top line number of 8.5% is still large compared with this time a year ago, the markets and some media outlets latched onto another statistic from the report. Compared to last month, the increase in the inflation rates was 0%, arguably signaling inflation might be slowing and, ideally, reversing. This may be why the markets have seemingly rebounded in the past few weeks.

That’s all well and good, but I want to dig into this report a little deeper. Too often, some take shortcuts, opting to focus on a single number. The reality is that many of the numbers have continued to increase, especially the ones most experienced by everyday people.

In February’s column, “The Flaw of Average Inflation,” I wrote, “My point is this: there is no such thing as an ‘average’ inflation rate. Instead, each of us will have our own personal inflation rate based on the variables in our lives.”

I still believe this to be true, which is all the more reason why it’s essential to understand your own personal inflation rate. An apt comparison is the difference in monthly home expenditures for someone who purchased a house in Denver 10 years ago and someone currently renting. Assuming the homeowner opted for a fixed interest rate and perhaps refinanced at any point over the last two years, their cost is comparatively low and fixed. On the other hand, the renter must contend with yearly rent increases — often their single highest monthly expense. As a result, the renter is far more sensitive to inflation in the cost of housing than the homeowner.

Looking at the August report, because of slowing demand, the cost of gasoline decreased by 7.7%, but the price is still up 44% from one year ago. Food rose 1.1%, and shelter 0.5%. These are the items we all experience every day and contribute the most to our personal inflation rate. Offsetting the increases was the “fuel oil index,” which includes “…diesel, heating oil, and various other residual fuel oils,” according to the BLS. That dropped by 11% compared to last month but is still up 75.6% from a year ago. Keep in mind that most people don’t need heating oil for their homes in the summer. Decreasing demand begets decreasing costs. But that 75% increase will become very apparent when the snow arrives.

It’s important to remember that numbers can be used to tell a variety of stories. For example, one man’s 0% inflation increase is another’s inability to pay their electric bill this month.

This carries over to recession talks as well. The definition of a recession used to be two consecutive quarters of negative GDP growth. Real GDP growth typically includes inflation, so if the economy is growing at 3.5%, but inflation is 8.5%, GDP is contracting at a rate of 5%. But the last two generally accepted recessions (2001 and 2020) did not meet those requirements. So instead of a simple and straightforward definition, we turn to a group of economists at the National Bureau of Economic Research who use various measures beyond real GDP to make it “official.” Not wanting to bore you with their full definition, recessions essentially boil down to income and employment. If income and employment turn south, there’s a good chance economic output will be lower.

Despite our extremely high inflation figures, employment and income are strong.

This makes for a weird combination of rising prices and consumers capable of accommodating them. That’s not really a recession, even though it bears many resemblances to one.

But what the larger economy is doing at any time is always secondary to what’s happening in your world. Predicting and forecasting are tricky. It doesn’t matter to most if real GDP falls two quarters in a row or if NBER labels it an “official recession.” What matters is your personal economy, your kitchen table, your finances, and your plan.

If you get laid off in the coming months, it doesn’t matter what some council of economists says about the economy. You will feel it, emotionally and financially. Losing your job is a personal recession, no matter when it takes place in the economic cycle.

On the other hand, if we dive into an official recession and you’re able to hold onto your job, keep saving money and avoid working in a segment of the economy that gets hammered, it won’t feel like a recession to you personally.

Unemployment rates, inflation rates, personal income averages, savings rates, and all kinds of other economic data can do a decent job of helping us understand trends in the economy on the aggregate. Still, we all have our own unique spending habits, finances, and circumstances. You don’t have to predict the economic future to be financially successful. Market outlooks are more helpful to your ego than your performance. What matters is that you have a plan and the discipline (or a financial coach) to keep you on track.

What does your personal economy look like? How has your spending changed over the last year, and in what areas? Does your income feel secure? These questions are far more critical to your long-term success than the national data we’ve seen. I encourage you to document and understand your spending and income. They are a far better measure of financial wellbeing than national recessions and inflation.

Steve Booren is the founder of Prosperion Financial Advisors in Greenwood Village. He is the author of “Intelligent Investing: Your Guide to a Growing Retirement Income.” He was named by Forbes as a 2021 Best-in-State Wealth Advisor, and a Barron’s 2021 Top Advisor by State. This column is not intended to provide specific investment advice or recommendations.

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