Finance

Cryptocurrencies have suffered a brutal comedown this year, losing $2 trillion in value since the height of a massive rally in 2021.
While there are parallels between today’s meltdown and crashes past, a lot has changed since the last major bear market in crypto.
The crypto market has been flooded with debt thanks to the emergence of centralized lending schemes and so-called “decentralized finance.”
The collapse of the algorithmic stablecoin terraUSD and the contagion effect from the liquidation of hedge fund Three Arrows Capital, highlighted how interconnected projects and companies were in this cycle.

The two words on every crypto investor’s lips right now are undoubtedly “crypto winter.”
Cryptocurrencies have suffered a brutal comedown this year, losing $2 trillion in value since the height of a massive rally in 2021.

Bitcoin, the world’s biggest digital coin, is off 70% from a November all-time high of nearly $69,000.
That’s resulted in many experts warning of a prolonged bear market known as “crypto winter.” The last such event occurred between 2017 and 2018.
But there’s something about the latest crash that makes it different from previous downturns in crypto — the latest cycle has been marked by a series of events that have caused contagion across the industry because of their interconnected nature and business strategies.

From 2018 to 2022

Back in 2018, bitcoin and other tokens slumped sharply after a steep climb in 2017.
The market then was awash with so-called initial coin offerings, where people poured money into crypto ventures that had popped up left, right and center — but the vast majority of those projects ended up failing.

“The 2017 crash was largely due to the burst of a hype bubble,” Clara Medalie, research director at crypto data firm Kaiko, told CNBC.
But the current crash began earlier this year as a result of macroeconomic factors including rampant inflation that has caused the U.S. Federal Reserve and other central banks to hike interest rates. These factors weren’t present in the last cycle.
Bitcoin and the cryptocurrency market more broadly has been trading in a closely correlated fashion to other risk assets, in particular stocks. Bitcoin posted its worst quarter in more than a decade in the second quarter of the year. In the same period, the tech-heavy Nasdaq fell more than 22%.
That sharp reversal of the market caught many in the industry from hedge funds to lenders off guard.

As markets started selling off, it became clear that many large entities were not prepared for the rapid reversal

Clara Medalie
Research Director, Kaiko

Another difference is there weren’t big Wall Street players using “highly leveraged positions” back in 2017 and 2018, according to Carol Alexander, professor of finance at Sussex University.
For sure, there are parallels between today’s meltdown and crashes past — the most significant being seismic losses suffered by novice traders who got lured into crypto by promises of lofty returns.
But a lot has changed since the last major bear market.
So how did we get here?

Stablecoin destabilized

TerraUSD, or UST, was an algorithmic stablecoin, a type of cryptocurrency that was supposed to be pegged one-to-one with the U.S. dollar. It worked via a complex mechanism governed by an algorithm. But UST lost its dollar peg which led to the collapse of its sister token luna too.
This sent shockwaves through the crypto industry but also had knock-on effects to companies exposed to UST, in particular hedge fund Three Arrows Capital or 3AC (more on them later).

“The collapse of the Terra blockchain and UST stablecoin was widely unexpected following a period of immense growth,” Medalie said.

The nature of leverage

Crypto investors built up huge amounts of leverage thanks to the emergence of centralized lending schemes and so-called “decentralized finance,” or DeFi, an umbrella term for financial products developed on the blockchain.
But the nature of leverage has been different in this cycle versus the last. In 2017, leverage was largely provided to retail investors via derivatives on cryptocurrency exchanges, according to Martin Green, CEO of quant trading firm Cambrian Asset Management.
When the crypto markets declined in 2018, those positions opened by retail investors were automatically liquidated on exchanges as they couldn’t meet margin calls, which exacerbated the selling.
“In contrast, the leverage that caused the forced selling in Q2 2022 had been provided to crypto funds and lending institutions by retail depositors of crypto who were investing for yield,” said Green. “2020 onwards saw a huge build out of yield-based DeFi and crypto ‘shadow banks.'”
“There was a lot of unsecured or undercollateralized lending as credit risks and counterparty risks were not assessed with vigilance. When market prices declined in Q2 of this year, funds, lenders and others became forced sellers because of margins calls.”

Read more about tech and crypto from CNBC Pro

A margin call is a situation in which an investor has to commit more funds to avoid losses on a trade made with borrowed cash.
The inability to meet margin calls has led to further contagion.

High yields, high risk

At the heart of the recent turmoil in crypto assets is the exposure of numerous crypto firms to risky bets that were vulnerable to “attack,” including terra, Sussex University’s Alexander said.
It’s worth looking at how some of this contagion has played out via some high-profile examples.
Celsius, a company that offered users yields of more than 18% for depositing their crypto with the firm, paused withdrawals for customers last month. Celsius acted sort of like a bank. It would take the deposited crypto and lend it out to other players at a high yield. Those other players would use it for trading. And the profit Celsius made from the yield would be used to pay back investors who deposited crypto.
But when the downturn hit, this business model was put to the test. Celsius continues to face liquidity issues and has had to pause withdrawals to effectively stop the crypto version of a bank run.
“Players seeking high yields exchanged fiat for crypto used the lending platforms as custodians, and then those platforms used the funds they raised to make highly risky investments – how else could they pay such high interest rates?,” said Alexander.

Contagion via 3AC

One problem that has become apparent lately is how much crypto companies relied on loans to one another.
Three Arrows Capital, or 3AC, is a Singapore crypto-focused hedge fund that has been one of the biggest victims of the market downturn. 3AC had exposure to luna and suffered losses after the collapse of UST (as mentioned above). The Financial Times reported last month that 3AC failed to meet a margin call from crypto lender BlockFi and had its positions liquidated.
Then the hedge fund defaulted on a more than $660 million loan from Voyager Digital.
As a result, 3AC plunged into liquidation and filed for bankruptcy under Chapter 15 of the U.S. Bankruptcy Code.

Three Arrows Capital is known for its highly-leveraged and bullish bets on crypto which came undone during the market crash, highlighting how such business models came under the pump.
Contagion continued further.
When Voyager Digital filed for bankruptcy, the firm disclosed that, not only did it owe crypto billionaire Sam Bankman-Fried’s Alameda Research $75 million — Alameda also owed Voyager $377 million.
To further complicate matters, Alameda owns a 9% stake in Voyager.
“Overall, June and Q2 as a whole were very difficult for crypto markets, where we saw the meltdown of some of the largest companies in large part due to extremely poor risk management and contagion from the collapse of 3AC, the largest crypto hedge fund,” Kaiko’s Medalie said.
“It is now apparent that nearly every large centralized lender failed to properly manage risk, which subjected them to a contagion-style event with the collapse of a single entity. 3AC had taken out loans from nearly every lender that they were unable to repay following the wider market collapse, causing a liquidity crisis amid high redemptions from clients.”

Is the shakeout over?

It’s not clear when the market turbulence will finally settle. However, analysts expect there to be some more pain ahead as crypto firms struggle to pay down their debts and process client withdrawals.
The next dominoes to fall could be crypto exchanges and miners, according to James Butterfill, head of research at CoinShares.
“We feel that this pain will spill over to the crowded exchange industry,” said Butterfill. “Given it is such a crowded market, and that exchanges rely to some extent on economies of scale the current environment is likely to highlight further casualties.”
Even established players like Coinbase have been impacted by declining markets. Last month, Coinbase laid off 18% of its employees to cut down on costs. The U.S. crypto exchange has seen trading volumes collapse lately in tandem with falling digital currency prices.
Meanwhile, crypto miners that rely on specialized computing equipment to settle transactions on the blockchain could also be in trouble, Butterfill said.
“We have also seen examples of potential stress where miners have allegedly not paid their electricity bills, potentially alluding to cash flow issues,” he said in a research note last week.
“This is likely why we are seeing some miners sell their holdings.”
The role played by miners comes at a heavy price — not just for the gear itself, but for a continuous flow of electricity needed to keep their machines running around the clock.

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Lightyear, a stock trading app based in the U.K., has raised $25 million in fresh funding to expand its presence across Europe.
The investment round was led by Silicon Valley’s Lightspeed, with additional backing from British billionaire Richard Branson.
The company will launch its app in 19 more European countries Thursday, including Germany, France and Italy.

The Lightyear app.

Lightyear, a European challenger to trading platform Robinhood, has raised $25 million of funding in an investment round backed by British billionaire Richard Branson.
Silicon Valley’s Lightspeed Venture Partners led the deal, the company told CNBC exclusively — a rare vote of confidence for an upstart brokerage at a time when global stock markets are deep in the red.

Founded in London last year by Estonian entrepreneurs Martin Sokk and Mihkel Aamer, Lightyear offers commission-free trading in over 3,000 global stocks and multi-currency accounts. Sokk and Aamer previously worked at Wise, the U.K.-listed money transfer firm.
“For too long, financial markets have been overly complex with high barriers to entry and confusing jargon,” Branson said in a statement shared with CNBC.
“Martin, Mihkel and the Lightyear team are lifting the lid on the world of investing – making it more transparent whilst empowering people through education – to choose the products which are right for them.”
The air and space travel tycoon took an undisclosed stake in Lightyear through his conglomerate Virgin Group.

European expansion

It’s still a young start-up, having only launched in the U.K. in September. But Lightyear has ambitious expansion plans.

The firm will launch its app in an additional 19 European countries including Germany and France Thursday, expanding its footprint to the euro zone. It’s aiming to launch in non-euro countries like Sweden and Norway next.
The deal shows how there’s still ample investor appetite for an investment app focused on Europe, even as Robinhood faces a lull in trading volumes stateside, according to Nicole Quinn, general partner at Lightspeed.
“Retail investing last year more than doubled in the U.S. Up to a fifth of all trades are retail investors in the U.S.,” she told CNBC. “We believe that Europe is heading in that direction.”
Still, the cash injection comes at a difficult time for equity markets, which have tumbled in response to fears of a looming recession — Robinhood is down roughly 78% from its IPO price.
Martin Sokk, Lightyear’s CEO, said he’s not worried about the declines in public markets.
“The markets going up, down or sideways doesn’t impact us too much because we’re building something that takes an awfully long time,” he said in an interview.

Fierce competition

Though Europe may be behind the U.S. when it comes to the prevalence of retail trading, the region has become increasingly crowded with various online trading apps on the hunt for clients.
Lightyear faces competition from both established brokers like Hargreaves Lansdown and AJ Bell and fintechs such as Revolut, Freetrade and eToro. Meanwhile, Robinhood has also signaled its intention to enter the European market, although with a focus on crypto rather than shares.
The company previously tried to launch in the region some years ago, but scrapped the plans to focus on its home market instead. It has since agreed to acquire U.K.-based crypto exchange Ziglu.
In May, Lightyear tapped Wander Rutgers, who previously led Robinhood’s U.K. expansion efforts, as its chief operating officer.
Investors have soured on high-growth tech companies like Robinhood lately over concern that their loss-making business models may not endure a deteriorating economic climate marked by rising inflation and tighter monetary policy.
Lightyear isn’t yet profitable. Right now, its main source of income is a flat 0.35% on currency conversions for trading in foreign shares.
Sokk says the firm plans to eventually diversify its revenue stream with additional features, including a paid subscription service that’s set to launch later this year.

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Crypto company Celsius has started the process of filing for Chapter 11 bankruptcy protection.
Earlier, CNBC reported the company’s lawyers were notifying individual U.S. state regulators of those plans, according to a source, who asked not to be named because the proceedings were private.
Celsius made headlines a month ago after freezing customer accounts, blaming “extreme market conditions” and joins a list of other high-profile crypto bankruptcies.

Celsius on Thursday was sued by former investment manager Jason Stone, as pressure continues to mount on the firm amid a crash in cryptocurrency prices. Stone has alleged, among other things, that Celsius CEO Alex Mashinsky (above) was “able to enrich himself considerably.”
Piaras Ó Mídheach | Sportsfile for Web Summit | Getty Images

Crypto company Celsius has started the process of filing for Chapter 11 bankruptcy protection after a month of turmoil.
In a Wednesday statement, Celsius said it would look to stabilize its business by restructuring in a way “that maximizes value for all stakeholders.” Celsius said it has $167 million in cash on hand to support operations in the meantime.

Earlier, CNBC reported the company’s lawyers were notifying individual U.S. state regulators as of Wednesday evening, according to a source, who asked not to be named because the proceedings were private.
“This is the right decision for our community and company,” Alex Mashinsky, co-founder and CEO of Celsius said in a statement. “I am confident that when we look back at the history of Celsius, we will see this as a defining moment, where acting with resolve and confidence served the community and strengthened the future of the company.”
The Hoboken, New Jersey-based company made headlines a month ago after freezing customer accounts, blaming “extreme market conditions.”
Wednesday’s news marks the latest high-profile crypto bankruptcy as prices plummet.
Voyager filed for Chapter 11 bankruptcy protection last week, after suffering losses due to exposure to now defunct hedge fund Three Arrows Capital. A judge in New York bankruptcy court froze Three Arrows Capital’s remaining assets this week. The fund is now in the process of liquidation proceedings.

“Unfortunately, this was expected. It was anticipated. It does not, however, stop our investigations. We will continue investigating the company and working to protect its clients, even through its insolvency,” Joseph Rotunda, director of enforcement at the Texas State Securities Board, said of the Celsius bankruptcy filing.
Celsius did not immediately respond to CNBC’s request for comment.
The company has more than 100,000 creditors, which could include both customers and lending counterparties, according to the bankruptcy document. Its largest unsecured claim is an $81 million from Caymans Island-based Pharos Fund. The filing also lists billionaire FTX CEO Sam Bankman-Fried’s trading firm, Alameda Research, as a creditor with a $12 million unsecured loan.
Celsius was one of the largest players in the crypto lending space with more than $8 billion in loans to clients, and almost $12 billion in assets under management as of May. Celsius said it had 1.7 million customers as of June and was competing with its interest-bearing accounts and yields as high as 17%.
The firm would lend customers’ crypto out to counterparties willing to pay a sky-high interest rates to borrow it. Celsius would then split some of that revenue with users. But the structure came crashing down amid a liquidity crunch in the industry.

The company was sued last week by a former investment manager who alleged Celsius failed to hedge risk, artificially inflated the price of its own digital coin, and engaged in activities that amounted to fraud.
Six state regulators have already launched investigations into Celsius. Vermont became the latest to do so earlier on Wednesday. The state’s Department of Financial Regulation said Celsius “deployed customer assets in a variety of risky and illiquid investments, trading, and lending activities.”
“Celsius customers did not receive critical disclosures about its financial condition, investing activities, risk factors, and ability to repay its obligations to depositors and other creditors,” the Vermont regulator said in a statement. “The company’s assets and investments are probably inadequate to cover its outstanding obligations.”

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Stock futures slipped Wednesday night as traders look ahead to earnings from major U.S. banks.
Dow Jones Industrial Average futures shed 117 points, or 0.38%. S&P 500 and Nasdaq 100 futures were down 0.41% and 0.47%, respectively.

Stocks slipped during Wednesday’s session after June inflation data came in hotter than expected, hitting its highest level in since 1981 and stoking fears that the Federal Reserve will have to hike interest rates more aggressively in the coming months to bring down price increases.
The consumer price index rose 9.1% on the year in June, higher than economist estimates of an 8.8% year-over-year increase. Core CPI, which excludes volatile prices of food and energy, was 5.9%, also ahead of the 5.7% estimate.
In addition, the Beige Book, released Wednesday by the Fed showed worries of an upcoming recession amid high inflation.
The CPI report also impacted treasuries, sending the 2-year Treasury yield up nine basis points to about 3.138% while the yield on the 10-year Treasury fell about 4 basis points to 2.919. An inversion of the two is a popular signal of a recession.
If the Fed says, “everything’s on the table, all of a sudden you have to start pricing in a recession,” said Dan Nathan, principal of RiskReversal Advisors, during CNBC’s “Fast Money.”

Earnings season continues Thursday with JPMorgan Chase and Morgan Stanley scheduled to report before the bell on Thursday.
Weekly jobless claims and the June producer price index report, which measures prices paid to producers of goods and services, will also be released Thursday. Both reports will give further insight into the economy.

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The logo and trading symbol for Twitter is displayed on a screen on the floor of the New York Stock Exchange (NYSE) in New York City, July 11, 2022.
Brendan McDermid | Reuters

Check out the companies making headlines in midday trading.
Unity Software — Shares tumbled 17.5% after the interactive software company announced a merger agreement with app software company ironSource in a $4.4 billion all-stock transaction. Unity also cut its full-year revenue guidance. Shares of ironSource soared 47.1% on the news.

Stitch Fix — Shares of Stitch Fix surged 13.6% after Bill Gurley of Benchmark Capital, who also sits on the board of the clothing company, announced that he’d bought 1 million shares of the stock, adding to his previous stake of 1.22 million shares. Gurley paid an average price of $5.43 per share for the stock, according to an SEC filing.
Twitter — Shares of the social media company climbed 7.9% after the firm filed suit against Elon Musk after he terminated his $44 billion deal to buy the company. Twitter said that Musk’s conduct during his pursuit of the social network amounted to “bad faith.”
DigitalOcean — Shares of the cloud computing company dropped 3.5% after Goldman Sachs issued a double downgrade to sell from buy. DigitalOcean could get hit with slowing demand, particularly from consumers overseas, the firm said.
Delta Air Lines — Shares of Delta Air Lines dropped 4.5% following a mixed earnings report. Other airline stocks dropped. Shares of American Airlines also declined 3.1%, and Alaska Air Group fell 1.3%.
Fastenal — Shares of Fastenal declined 6.4% after the industrial supplies company reported softening demand in its most recent quarter. “Demand remained generally healthy, but there were certain signs of softening that emerged in May and June,” read remarks from CEO Daniel L. Florness.

Gap — Shares of the retailer dropped 0.2% on the heels of a downgrade to hold from buy at Deutsche Bank. The firm cited execution issues at the company, the increased promotional environment of retail and the departure of CEO Sonia Syngal as reasons for the downgrade.
Advanced Micro Devices — Several chip stocks outperformed on Wednesday. Shares of Advanced Micro Devices and Qualcomm jumped 1.5% and 2%, respectively.
— CNBC’s Yun Li, Jesse Pound and Carmen Reinicke contributed reporting.

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At this point upside surprises in inflation occur with such frequency that surprise is probably the wrong word for them. So it was with America’s consumer price index (cpi) for June, published on July 13th. It soared 9.1% compared with a year earlier, marking yet another four-decade high and beating forecasts for an 8.8% increase. Still, investors seemed to be caught unawares, with stocks falling sharply after the data, adding to this year’s big losses. The pessimism in financial markets is easily understood: persistently high inflation is forcing the Federal Reserve to press on with aggressive monetary tightening, even at the potential cost of a recession.All the more important, therefore, to understand how persistent inflation will be. In this respect the most concerning part of the latest data was not the shocking headline figure, about half of which could be attributed to oil and gas prices, which surged early in June but have since ebbed. Rather, it was the change in core prices, stripping out volatile food and energy.Core inflation rose 0.7% in June from May, the highest month-on-month increase in a year. And it was not a blip: over the past three months core inflation has been running at an annualised rate of nearly 8%, an indication of the breadth of price pressures (see chart). Just about everything—from cars to clothing and furniture to rents—is getting more expensive.That reinforces investors’ belief that the Fed will stay on its hawkish path. A day before the inflation data, bond-market pricing implied that the Fed would raise interest rates by three-quarters of a percentage point at its next rate-setting meeting in late July, the second straight increase of that size. Following the data, bond pricing put the chances at roughly 50-50 that it would instead opt for a full percentage point increase. Either way, it puts the Fed on track for the steepest monetary tightening in a calendar year since 1981, when Paul Volcker was at the central bank’s helm. That is already weighing on economic growth.America is hardly alone in struggling with high prices. Inflation in the euro area is expected to have risen to 8.6% in June. But the details are different. Europe’s problems are more closely linked to surging gas costs, both exacerbating the risk of an imminent recession and perhaps limiting the European Central Bank’s scope for rate increases. That has hurt the euro, which has fallen more than 10% since the start of the year, bringing it to parity with the dollar for the first time in two decades.The White House has tried to put as positive a gloss as possible on the figures. Prior to the data release, it drew attention to the recent decline in petrol prices. The national average is now about $4.63 per gallon, 5% lower than in June. With the price of crude down by even more, that does probably set the stage for a lower inflation reading in July. Moreover, President Joe Biden’s advisers have noted that an alternative gauge of inflation, the personal-consumption-expenditure (pce) price index, which is usually seen as more reliable by the Fed, has been more muted.[embedded content]Neither argument is all that reassuring. Energy prices have weakened over the past month, but with the war in Ukraine dragging on and winter looming, they may resume their upward climb before long. As for pce inflation, it is indeed less extreme than cpi inflation, but it is still more than twice as high as the Fed’s 2% target, and rising prices for services such as health care may nudge it higher still.The best news about inflation is that the Fed’s tightening is in fact gaining traction in the crucial realm of expectations. The Fed cannot solve supply-chain snarls or reduce oil prices. Where it can be uniquely effective is in tempering the outlook for prices. A basic measure of market expectations for annual inflation over the next five years is now 2.5%, down by more than a percentage point since March. In the middle of June a closely watched consumer survey by the University of Michigan put expected annual inflation at 3.3% for the next five years; by the end of the month it was down to 3.1%. That is precisely what the Fed wants to see. Unfortunately, economists, firms and investors are also busily ratcheting down their expectations for economic growth—a consequence the Fed cannot avoid. ■For more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter. More

At this point upside surprises in inflation occur with such frequency that surprise is probably the wrong word for them. So it was with America’s consumer price index (cpi) for June, published on July 13th. It soared 9.1% compared with a year earlier, marking yet another four-decade high and beating forecasts for an 8.8% increase. Still, investors seemed to be caught unawares, with stocks falling sharply after the data, adding to this year’s big losses. The pessimism in financial markets is easily understood: persistently high inflation is forcing the Federal Reserve to press on with aggressive monetary tightening, even at the potential cost of a recession.Listen to this story. Enjoy more audio and podcasts on More

Inflation jumped by 9.1% in June relative to a year earlier, the largest increase since the end of 1981.
The Consumer Price Index, an inflation measure, gauges how quickly costs are rising for a broad basket of goods and services.
But your personal basket likely differs from the CPI basket, meaning your personal inflation rate is different. Here’s how to calculate it.

Grocery shopping in Rosemead, California on April 21, 2022.
Frederic J. Brown | Afp | Getty Images

Inflation jumped to a new 40-year high in June, the U.S. Bureau of Labor Statistics reported Wednesday. That means the prices Americans pay at the gas pump, grocery store and elsewhere have been rising much faster than normal this year.
That may lead you to wonder: How much have my personal household costs increased, and how does that stack up against the average American’s?

Calculating your personal inflation rate can help answer these questions.
The Consumer Price Index is a common inflation measure. Households paid 9.1% more money in June 2022 for a broad basket of goods and services relative to that same basket in June 2021 — the largest annual jump since November 1981.
More from Personal Finance:What Americans are doing to prepare for a recessionEven if you don’t drive, you’re getting stung by higher gas pricesThese 10 U.S. real estate markets are cooling the fastest
However, your basket is likely different. For one, purchases and consumption habits vary from household to household, based on factors such as income, age and geography, according to Brian Bethune, an economist and professor at Boston College.
This means your personal inflation rate likely diverges from the U.S. average, too.

There are a few ways to calculate your inflation rate. The pitfalls of such a calculation came into focus earlier this month when Nikki Haley, former U.S. ambassador to the United Nations during the Trump administration, tweeted an incorrect estimate for a July Fourth cookout.
Her tweet, which has since been deleted, pegged a barbecue as 67.2% more expensive relative to last year. By comparison, the American Farm Bureau Federation said costs had increased 17% — a much smaller rise, though still elevated. President Joe Biden cited that agriculture trade group in 2021 when the White House said costs for an Independence Day BBQ had decreased 16 cents relative to 2020.

How to calculate your personal inflation rate

Here’s the simplest way to get a rough estimate of your personal annual inflation rate, according to economists.

The first step is to determine how much of your spending falls into certain categories or buckets, such as food, energy, clothing, housing and entertainment.To do this, you’ll need to consult your bank and credit card statements for the past year to find exact spending amounts. The U.S. Bureau of Labor Statistics publishes a detailed list that can help you itemize your purchases by category.
Calculate your category “weights.” This weighting is basically the share of your spending devoted to specific buckets. The consumer price index calls this weighting “relative importance.”To do this, tally your total spending within categories. Divide each number by your aggregate annual spending to calculate the category weight.For example, let’s say my total household spending from June 2021 to June 2022 was $50,000. I spent $17,000 (or 34% of the total) on rent and $6,000 (or 12%) on groceries. Their category weights would be 0.34 and 0.12, respectively.
Reference the BLS table of detailed expenditure categories again. The “unadjusted percent change” column shows the average annual percent increase in price for each item.For example, rent payments increased 5.7% in the year through June. The price of food at home (groceries) rose 12.2% in the same period.
Multiply the category weights in step 2 by the annual percent change for those categories in step 3. Using the above example, you’d multiply 0.34 x 5.7 for the rent calculation. Multiply 0.12 x 12.2 for food. And so on for all other spending categories.
To determine your personal inflation rate, add up the category totals from step 4. (In the above example: 1.938 + 1.464 + etc.) This total is your annual inflation rate expressed as a percentage.
Compare your rate to the national average. For annual spending through this June, a percentage that’s lower than 9.1% means your costs haven’t increased as much as the average American.A higher number means your costs have risen more in the past year. Of course, households generally think in terms of dollars and cents, not percentages.

A more precise way to calculate your rate

Jamie Grill | Getty Images

The above calculation compares your household experience to the average American, based on the differences in goods and services, as well as the quantity, that each household buys. However, the formula leverages price averages for those goods and services — meaning it’s not a hyper-individualized calculation.
Consumers can do some additional calculations to get a more precise understanding of how their individual household spending has changed from year to year:  

Tally all expenses from your bank and credit card statements in the past 12 months, as well as for the prior 12-month period.
Subtract the totals and divide by the first year’s spending. For example, let’s say my spending was $50,000 from June 2021 to June 2022, and it was $45,000 from June 2020 to June 2021. Divide the difference ($5,000) by $45,000.
Multiply that number from step 2 by 100 to determine your personal annual inflation rate.

In the above example, I’d multiply 0.111 by 100. My personal annual inflation rate over that period would have been 11.1%.

Using cash, shopping sales can skew results

There are a few caveats. For one, you’re likely unable to account for any spending made in cash. It’s also likely you’ve sought out less-expensive alternatives where possible — substituting less-expensive foods, for instance — or maybe you’re driving less to save on gasoline.
This all means your calculation might not be 100% accurate, but it will be in the ballpark.

Further, costs aren’t rising in a vacuum. If you’re working, your income has likely increased, too. Average wages are up 6.1% in the past year, according to the Federal Reserve Bank of Atlanta. They haven’t kept pace with the average inflation rate, but more household income erodes some of the financial pain.
“If you have to shell out more dollars just to get the same items and your income isn’t keeping up with that, then your quality of life is deteriorating,” Alex Arnon, associate director of policy analysis for the Penn Wharton Budget Model, said of inflation’s impact.
Correction: Inflation rose at its fastest pace since November 1981. A previous version misstated the month.

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