CBSMoneyWatch published a piece of screed this week on the Inflation Conspiracy pretty much mocking and patronizing people who question the value or validity of the government’s official measure of inflation. The author somewhat misrepresents the intent of mainstream inflation critics by saying they “believe that somehow there’s an inflation conspiracy going on, and the government is manipulating the numbers to keep the official rate low“. So, OK, there are some people who do take it that far, but what many feel, and it’s tough to argue against, is more tied to the way the indices are formulated and weighted and how relevant those measures are in today’s society. After all, aren’t all governments somewhat incentivized to understate true inflation? Our government got to hold Social Security payments steady two years straight due to flat CPI. That saved Trillions over a historical low single digit increase. China lies about their inflation all the time. Please name a country that “overstates” their inflation.
The notion that formulas matter is poo-pooed with the following line, “while you could quibble with the formulas, it doesn’t really matter, because the bond market is telling you that there currently is very little inflation and little worry about big inflation any time on the horizon“. This is a somewhat simplistic view of how inflation works and is perceived.
First off, the bond market reflects many measures, with current inflation being just a single facet. The bond market reacts to future perceived inflation, not what happened last quarter, while the CPI is reporting historical inflationary statistics. So, this guy’s comparing a bond market which trades on anticipation versus an index which is a rearview mirror. Next, you could actually have very high current AND future inflation and still have bonds with low interest rates. How? Well, if the thinking is that rising inflation is going to drive the economy into the shitter and we’re looking at a double dip recession while we already have 8% unemployment, we’re entering very dangerous territory and risk assets are going to shift into bonds. Finally, US Treasuries are also very much dependent upon what’s going on elsewhere. We don’t live in a vacuum! Europe is burning – literally – from protests everywhere from Spain to Greece, over Austerity, bailouts and basically, debt. So, if our bonds appear to be strong with low interest rates, it’s because we’re the lesser of multiple bad options for sovereign fixed income.
Here’s the sage advice the author offers: “If you want to understand inflation as an investor, don’t focus on your grocery cart or gas tank; follow the bond market“.
Umm, last time I checked, groceries, gas and other things that are in a continual upward trajectory like healthcare costs, college tuition and now, the cost of credit, are all rising well above historical inflation. These are the things typical Americans spend their money on. When 75% of your budget is seeing 5-6% inflation and the CPI-specific categories rose “just” (as the author states) 3.2% at the same time wages rise 1%, doesn’t it stand to reason that there’s less buying power in the economy? Anecdotally, I can’t help but notice inflation in our household and we’re actually toward the higher end of the income continuum in America. How the heck does someone making $35,000 feel when these inflation-prone expenditures comprise a higher portion of their income?
On one hand, it’s tough to argue with data and if the formulas that comprise the CPI and other government inflation measures say the “index” rose “just” 3.2%, then fine. But 3.2% isn’t trivial in a stagnant economy, and more importantly, what’s being measured isn’t as relevant to most Americans as the government would have you believe.
What Are Your Thoughts?
Do You Feel Inflationary Pressures This Year? Or Has Your Buying Power Increased?