Inflation is generally portrayed as the rate by which prices increase over time. The U.S. Government measures the level of prices over time using the Consumer Price Index, or CPI. While there are several versions of the CPI, the most common measurement reports prices for “all urban consumers.” For years I have examined the truth and fiction of reporting on the topic of inflation. For as many years, I have known that we are being lied to by our so-called “leaders,” who consistently understate price level increases.
We have all seen inflation in action. Perhaps the most obvious day-to-day evidence is found at the grocery store, where prices have been rising steeply for years. Not only that, containers are getting smaller, and many are not filled to the top. “Shrinkflation” is the new word for reduced quantities of cereal, coffee, and various other household staples on the shelves. On the topic of food, have you checked out restaurant prices lately?
Inflation doesn’t stop there. Pay your health insurance premiums; check the increases in your deductibles and out-of-pocket medical expenses. Pay your homeowner’s insurance premium; what was it two years ago? Fill up your gas tank and check the numbers. Buy dog food, pay tuition bills, go to a movie, pay your cable TV and Internet services; they have gone up, and many by a LOT! Wages and salaries have not kept pace. Social Security recipients have been denied any COLA increase three times since 2010, with only small increases in other years.
Simply put, inflation is on the rise. In order to understand why, we need to look at the real definition of inflation. Nobel Laureate economist Milton Friedman said it best: “[Inflation is] always and everywhere a monetary phenomenon.” By this definition, rising prices are a symptom of inflation, or a result of inflation, rather than the definition of inflation.
Placing more money in circulation without proportionate increases in GDP results in less actual value per dollar. That is the true definition of inflation. Government printing presses have been running overtime for years. That encompasses both the physical printing press, plus the more clandestine electronic-entry money creator called the Federal Reserve.
Why does the government obfuscate truth with statistics? Simple; there would be an accelerating budget deficit and national debt if they acknowledged the truth in the CPI. Federal salaries and benefits, Social Security, indexed pensions, labor contracts, you name it – all are indexed to the CPI for annual Cost-of-Living (COLA) raises.
Today, the government has actually done something about it. Unfortunately for those of us who are collecting Social Security benefits, they “fixed it” on our nickel. Ushered in with the Tax Cuts and Jobs Act of 2017 is a concept called the “Chained CPI.” This measurement, which is used to calculate the annual COLA, takes into account human behavior.
The “Chained CPI” is explained like this. If steak gets too expensive, consumers will switch to hamburger. So, the Labor Department admits that we are rational, responsible citizens, who balance our personal budgets. Too bad they force us to do so by reducing our standard of living. What’s next, hamburger gets so expensive that we switch to Helper?
Financial expert Ed Butowsky developed his own method of price change measurement. Dubbed the Chapwood Index, after his investment firm, this index measures prices of things we all buy, city by city, over time. Butowsky compares the same items over time, so all comparisons are valid and weighted consistently.
Jacksonville is one of 50 cities used to track the Chapwood Index. The results are startling, but easy to believe, as they mirror what we all see day-to-day.
For last year (2017), the Chapwood Index for Jacksonville increased 8.6%, and for 5 years it averaged 8.1% annually. That’s a far cry from the approximately 2% reported by the government.
By comparison, higher cost cities have increased even more. For example, San Francisco was up 12.8% last year, and New York City increased 11.2%. If you believe these numbers, as I do, you can probably imagine the damage that is being inflicted on Middle Class Americans, from rising prices and relatively stagnant wages. It is just plain wrong.
What does all this mean to today’s investors? I contend that the true rate of inflation is being masked, but I am not here to teach a class in economics. My interest lies in developing an investment strategy that reflects changing conditions around us, including inflation. What are the investment assets that respond positively to inflation? How should we purchase and hold those investments?
Understanding inflation can help investors cope with the declining standard of living experienced by far too many older Americans. If you need help with inflation planning, use a qualified fee-only CFP®. We can help direct you through the planning and investing process.
Van Wie Financial is fee-only. For a reason.
