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Cost-of-living increases shape how, where you buy

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The latest monthly Consumer Price Index offers a guide to life in the year ahead. Of course, as they say on Wall Street, past performance is not a guarantee of future conditions. Use caution in adjusting your life to the materials that follow.

Between November 2011 and November this year, the Consumer Price Index rose by 1.8 percent. That does not mean your cost of living went up by that amount. Your tastes, preferences and habits determine what happened to your cost of living. If small increases in prices will get you to change the amounts you purchase, your cost of living may have declined.

Let’s consider some examples:

Medical care prices increased by 3.4 percent. If you did not use medical services, drugs and equipment during the past year, your cost-of-living increase was probably less than average. How will those two things be next year — both your usage and the price changes of medical care?

In the past year, the prices of food consumed at home rose by 1.3 percent, half as fast as food consumers ate outside the home. Again, what you had in your particular market basket differs from the “average consumer” such that your personal inflation rate could be much different.

Do you start your day with a breakfast cereal? Those prices rose by a mere 0.6 percent during the past year. The fresh whole milk you’ll have with that cereal went up by 2.6 percent. Balance that combo against the increase of 1.6 percent in the price of eggs and a robust 5.8 percent decline in coffee prices. Maybe protein and caffeine would be your choice.

Lunch? Frankfurters climbed only 1 percent in price, but hamburger meat rose 6.7 percent. In either case you’ll want to consider some cheese with that since those prices fell 1.1 percent. Want a soft drink and a sweet with that? Carbonated beverage prices decreased by 0.5 percent, while cookies rose by 3.5 percent.

If you choose to alter your consumption according to last year’s price changes, then you will want to rethink where you do your drinking. Alcohol beverages consumed at home saw prices rise just 0.7 percent, but those consumed in commercial establishments were up by 3.1 percent.

Beer at home went up in price by 1.5 percent. Wine for home consumption rose by a trifling 0.1 percent. But the distilled alcohol declined by 0.3 percent. If you follow the prices, you’ll give more attention to the hard stuff.

While treated lightly here, the Consumer Price Index is serious business that determines the changes in Social Security payments, the wages of millions of workers and the rental of property. How that index is constructed and used is of critical importance to the economy.

Once the problems of the fiscal cliff are resolved, the methodology behind the index might be the focal point of disputes in Congress.

Morton Marcus is an economist, formerly with the Indiana University Kelley School of Business. Send comments to letters@dailyjournal.net.

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