What is the CPI?
The Consumer Price Index is the government’s propaganda statement of how there is practically no inflation. Often it is referred to as the C.P. Lie. It says they haven’t really been able to attain 2% core inflation for years. Where I live, gas has gone up by 50% in the last year but that is excluded from the calculation because it is too volatile in price and could go down just as quickly. Where I live housing prices have gone up over 300% in the last ten years so it’s excluded from the the calculation because it’s also too volatile. Food is up at least 20% in the last 12 months but you guessed it, too volatile.
Why does the government exclude food, housing and energy from the core CPI?
These items are the necessities of life and they represent the bulk of what the majority of the population spends their money on. I can’t begin to know what goes on in the minds of out of touch bureaucrats but some research has led me to a few conclusions.
Firstly the central planners are always talking about trying to achieve higher inflation because they say it’s too low. I thought inflation was bad but that’s not true, according to them. It can’t be too high or too low. If it’s too high then the costs to the government are very high. Many pensions that the government pays have increases tied to the official inflation number, so higher is bad. Higher inflation makes the debt of the government easier to pay, so that’s good.
When inflation gets too high, currently more than 2%, then the central bank will have no choice but to raise interest rates. Higher interest rates mean that the cost of servicing the massive government debt goes up, so that’s bad. Increased interest rates mean that people with savings will be more likely to leave their savings in the relative safety of the bank because it will make a perceptible return, so that’s good. When people are making a return with the safety of bonds they are less likely to gamble their savings on riskier things such as the stock market which is bad. Rising interest rates make the cost of mortgages higher, so that’s bad.
What happens with low inflation?
When inflation is too low then the cost to service government debt increases because the money is not being devalued, so that’s bad. Low inflation causes the central bank to lower interest rates to encourage borrowing and therefore spending in order to stimulate the economy and create inflation. It also encourages people to spend their savings on goods because there is virtually no return from the bank.
The biggest loans with very low interest rates are mortgages and what happens when there is suddenly a flood of practically free cash for homes? You guessed it, home prices soar but that’s not included in the core CPI calculation so it doesn’t raise the inflation rate much other than increased prices in construction materials. Don’t worry though, the central planners will assure you that inflation is only at 1.7% even though the cost of a home went up double digits.
Housing, food and energy make up only a small part of the very wealthy’s income so they of course will not notice these wild swings in price as much. As far as overall expenses, the very wealthy may only see a 2% raise in their cost of living so it makes sense to them. When rent, the cost of purchasing a home, food and energy go up double digits many people find themselves having to make sacrifices to survive. Fortunately they will get a tiny raise in pay based on the government inflation numbers if they are lucky. It is obvious that the cost of living for a middle class family does not correlate with the inflation number.
Fifty years ago a middle class family could easily buy a house, have a car, eat well and go on an annual vacation with one income. How about now? Wages haven’t kept up with the cost of living. The median price of a house in Seattle has gone up over 200% in the last 10 years. The average american wage has gone up approximately 25% in the last 10 years. Somebody is obviously getting screwed here.
Maybe the government isn’t being completely truthful
There is the slim possibility that the government might be fudging the numbers a little here (sarcasm intended). I went down the rabbit hole of trying to figure out how the government manages to find an inflation rate of less than 2%. I know my cost of living has skyrocketed past my income, far more that 2% so the government has some explaining to do. I read pages and pages of claptrap and was able to boil it down to this.
An example would be the price of a refrigerator, known as a durable good. Something you might buy every 10 years or so. In reality the price hasn’t changed that much and maybe it inflated in price less than 2% but they can even make it cheaper. You see a 2021 fridge is much better than a 2011 fridge because it is enhanced with features the old fridge didn’t have so you can deduct the cost of those enhancements from the price. You can’t buy a fridge without the unneeded enhancements anymore so even if you could, it would be cheaper today but you can’t so you have to buy the enhanced fridge for more money. The mental gymnastics here is hard to figure out but one thing is obvious, it’s BS. Check out my post on statistics.
The point here is that the price of something you buy once in every decade does not impact your everyday life but it is the prices of those things that the government uses to calculate the CPI. Why would they do that? Put quite simply, they have no choice but to understate the inflation that hurts the middle class the most because it is their fault.
Government incompetence, waste and corruption have given rise to an unpayable debt. Even worse than that, we are now at a point that even a small interest rate increase would make government debt unserviceable. When a government can’t pay its debts, people lose faith in the money. When people take more risk they want more reward. If I buy a government bond I want more interest. The government has three choices as it spends more than it receives.
- Raise taxes (more inflation, more risk)
- Borrow more money (sell bonds which people want more interest on. It doesn’t matter what rate the fed sets, people pay less than face value for the bond therefore increasing the rate which in turn increases the cost of borrowing which increases inflation)
- Print money (This is called the monetization of debt. It’s complicated but it essentially borrowing money without the intention of ever paying it back. I would like one of these deals)
My conclusion is that we are headed for very serious inflation. Money in the bank is shrinking rapidly. Almost every economist on the planet says this whole mess of massive debt and money creation is hurtling us toward the biggest financial disaster in history. I don’t know if that is true but there are certainly many good reasons to believe it.
How to protect yourself
I honestly wish I knew the answer. I read constantly what non-government economist say and there does not seem to be a clear consensus. There is the usual gold bugs and Bitcoin bugs. Less so for real estate. Two that I read regularly, Jim Rickards & Harry dent, say there is no way out. Holy crap I hope they are wrong.
Michael invests does some nice regular easy to understand analysis of inflation, the housing market and central bank shenanigans which is worth watching.
As always these are just my opinions and observations. Please feel free to comment or correct me. We are all looking for answers.