Similar to Twain’s observation, reports of inflation’s death
have been greatly exaggerated. Despite tales to the contrary, it is alive and
well and making itself broadly felt. Indeed, we believe that inflation has been
vigorous for the past 3 years, and goes far beyond food, oil and natural gas.
That is, unless you rely on BEA headlines. We have long
lamented that the adjustments taken to arrive at a core CPI is one conveniently
bereft of increasing prices. These systemic modifications only serve to obscure
the actual inflation occurring in the economy. Friday’s CPI data was no
different. For readers who prefer their economics without artificial
sweeteners, we revisit this issue today.
Post-bubble, -recession and -9/11, the entire purpose of
unprecedented government stimulus has been to massively re-inflate a
flat-lining economy. At this, the government has succeeded all too well. Far
too many commentators insist that only Energy is going up in price; This canard
is belied by the data, and by your everyday experience.
The core rate has inflated significantly -
BLS data be damned. To wit:
• Commodities: The CRB Index has spiked since 2002. This move is roughly equivalent to
1976-77 increase. The late 70s inflation spike came on top of the 1972 move, so
perhaps we should consider ourselves fortunate-so far; Nonetheless, CRB has been going higher for 4 years.
• Health Care Expenses: Have been going significantly for
nearly a decade. Anecdotally, health insurance premiums have been rising 15%
annually. (How much has your own firm’s premiums run up? Next case);
• Precious metals: have moved higher, with Gold at
multi-decade (18 year) highs. We take rising Gold as a sign of inflation.
• Education: Anyone who isn’t employed by BLS knows
painfully well that tuition and textbooks have skyrocketed;
• Housing: Housing affordability is at a 14 year low,
despite mortgage rates still relatively cheap at 6%. Don’t look for this factor
in CPI, as the BLS model uses something known as Owner’s equivalent rent -
astonishingly, OER has actually fallen as home prices rose due to a rental
glut. (See nearby chart)
It hardly needs to be stated that if Inflation appears
robust in BLS data, then the many entitlement programs with COLA adjustments
will cost significantly more than the nearly 2/3rds of the Federal Budget they
consume at present. Given the precarious state of Uncle Sam’s finances, the
motivation for understating inflation is apparent.
However, unless investors
fully understand the risks which actual inflation presents to their equity and
bond portfolios, they may find themselves more reliant on entitlement programs
than they ever expected to be.