What is the real inflation number?

What is the real inflation number?

Friday, 11 June 2021

This week saw the release of US CPI data for the month of May, and after April’s surprise CPI print of an annualized 4%, we saw inflation continue to trend higher in the US with the official numbers coming in above expectations yet again at 5% on an annualized basis, the highest since August 2008. Gold’s reaction was somewhat sluggish, rising 0.5% on the day, as the market seems unconvinced that the inflation genie has been let out the bottle just yet. In this weeks update we look at alternative measures on inflation which could explain why the official CPI numbers have been so low despite the rapid expansion in global money supplies. 

After another inflation beat, the question on investors’ minds will be: what if inflation continues to spiral out of control and what impact that will have on all financial markets? Generally speaking, your superannuation balance is likely to be upset by rising inflation as it means both equity markets and bond markets could sell off in an environment where central banks have to tighten policy to reel inflation in. So, this could mean lower stock prices, lower bond prices, higher yields and higher interest rates, with most likely higher precious metals prices as the race to hedge inflation begins. Alas, the S&P 500 still managed to finish the day in the green, as the CPI print was only 0.3% higher than expectations, so it seems there is not much that can upset the bull market in US stocks as the euphoria continues uninterrupted for now.

Whilst everyone will be focused on the headline inflation number of 5%, there is another way to look deeper into the numbers. Bianco Research notes that the combined 2% jump in core CPI over the past three months marks the fastest rise since 1982, and is actually equivalent to an 8.3% annual growth rate. But due to coming off such a low base in previous months it will be very interesting to see next month’s number, as the argument by the Fed thus far has been that inflation is ‘transitory’ and nothing to worry about. Please note that the Federal Reserve does not have the best track record for forecasting, so you can take their inflation forecasts with a grain of salt.

The inflation we experience in everyday life often seems to feel much higher than the official CPI numbers due to the way they calculate the basket of goods and what weighting certain goods have. From the US Bureau of Labor Statistics (BLS) themselves The CPI is a statistical estimate that is subject to sampling error because it is based upon a sample of retail prices and not the complete universe of all prices.’ The accuracy of the official CPI is a bit questionable to say the least; however, Central Banks will base policy on the official CPI no matter how cooked it may be.  The table below shows the breakdown of how US CPI is calculated and we can see the absence of financial asset prices such as stocks and property.

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For an alternative look at inflation numbers in the US, you can take a look at John William’s Shadow Stats website, which shows what the inflation numbers would be if they continued to calculate it in the same way that it was in 1990 and also compares the older methodology used in 1980. According to Williams, ‘methodological shifts in government reporting have depressed reported inflation, moving the concept of the CPI away from being a measure of the cost of living needed to maintain a constant standard of living.’ You can see in the chart below the disconnect in the official inflation numbers soon after the methodology was changed, and based on applying the 1980’s methodology inflation in the US would actually be reported at over 10% on the recent May spike, and would have averaged close to 10% for the past 20 years. The old measure of inflation fits much better with the argument that gold is a natural inflation hedge, as the US gold price has averaged 9.6% per annum in the last 15 years. Much closer to the alternative 1980’s inflation calculation.


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Even using the more recently adjusted methodology that the BLS would use in the 1990’s, the inflation number for May would have been recorded at over 8%. A conspiratorial angle would conclude that it may not be a coincidence that these changes in the way inflation is measured have led to much lower official CPI numbers, as there always seems to be a hidden underlying incentive for central banks to create as much asset price inflation as possible, without moving the dial of the official CPI. Something that would greatly benefit the rich VS the poor and potentially a good reason as to why the world has more inequality today than previous decades.


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One potential flaw of the official US CPI calculation is that it doesn’t really capture the cost of buying a property. “Shelter” is listed as a component, however, shelter is calculated based on rental prices, or the potential rental prices that owner occupiers could hypothetically receive, if they rented their house out. From the BLS; housing units are not in the CPI market basket. Like most other economic series, the CPI views housing units as capital (or investment) goods and not as consumption items.’ So the number one expense in most family’s lifetimes, the price of buying a family home, is not factored in to the official CPI number. In fact, anything deemed as an investment misses out of the calculation.

Why not just factor in the actual average cost of buying a house month to month? Well, that would mean the official inflation number would be much higher, and the Central Bank would have to wind back the accommodative monetary policy that is propping up the over indebted economy. The US house price index has risen 13.8% in that last 12 months, but no, this is not a relevant number for calculating how much prices are rising across the economy….

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To point out how absurd the official CPI number is, the question put to consumers who own their own property in the Consumer Expenditure Survey is: “If someone were to rent your home today, how much do you think it would rent for monthly, unfurnished and without utilities?” To which the consumer responds with a complete guess off the top of their head, which then feeds through into the US official inflation number that central bank policies are based on. Official house price data is ignored, as anyone who buys a house is clearly just investing, right?


Until next week,

John Feeney

Guardian Gold Sydney

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Or on Twitter @JohnFeeney10

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