When talking with clients about inflation, nearly all of our conversations include examples that run completely counter to our government’s ongoing reports that inflation remains low here in the US.  We see many different examples that show inflation is not as low as the government would like us to believe including:  1) an increase in grocery prices either in dollar terms or in smaller sized items (which ruin all our mom’s recipes when it asks for a 12oz can and the can is now only 10.5oz!), 2) travel costs with higher prices for airplane tickets and higher costs to visit attractions (cost to go to the top of Empire State building is now $27 compared to $9 in 2001), and 3) rising tuition rates, just to name a few.  Why aren’t these higher costs reflected in the CPI?  The key reason is that the government has an incentive to keep the “reported” inflation rate low.  Pension payments (Social Security and Federal retiree pensions) are adjusted annually based on a Cost Of Living Adjustment (COLA) that increases the payment every year to the rate of inflation.  Shazzamm!  That is exactly what they have done and will do more of in the future with “Chained” CPI, which we will explain shortly.

To illustrate the point that the government has changed the way CPI is reported over the years to benefit themselves, we have attached two charts from shadowstats.com that shows what the inflation rate year-over-year change would be today if the CPI was calculated like it was prior to 1980 and again prior to the change in 1990.  As you can see, year-over-year, the inflation rate today would be much different if calculated using the two previous methods – prior to 1980 it would be close to 9% and over 4% if calculated using the pre-1990 method.  Obviously, these rates are much higher than the 1% being reported by the government today.  What is worse is the government is considering using a method called the Chained CPI to calculate future inflation for COLA adjustments.  The Chained CPI will allow the government to assume people change spending patterns when prices rise and use those assumed changes to report a much lower rate of inflation.  How does this work?  Let’s assume gas prices go up to $5 a gallon.  Based on this jump in gas prices, the government could then assume that consumers would revert to using mass transportation rather than buying a tank of gas at $5/gallon.  Thus, a jump in gasoline prices actually reduces consumers cost.  This is not inflationary.  Another example would be if the price of beef went up by 25%.  The government could adjust the price increase down by assuming that consumers will spend money on cheaper meat like pork and poultry because they can no longer afford beef!  This hides inflation.  If one wanted to buy gas or meat, the price is higher.  That is inflation!

A second reason to suppress the reported rate of inflation is to provide an easy explanation for the Federal Reserve to continue pumping unprecedented amounts of money into the system.  The future Chairman – Janet Yellen – has stated that she will continue to keep rates low for a long time because inflation is low.  As the charts below demonstrate, inflation is here, but being masked by the “magicians” in Washington.  The Federal Reserve is risking a surge of inflation by printing more and more dollars.  That is why Bitcoin has risen from $13 a coin to over $1,000 just this year!  People are looking for a haven to protect the purchasing power of their assets.

What does this mean for investors?

If you are a retiree, expect the purchasing power of your Social Security or pension to fall over your lifetime – even with a COLA adjustment.  As an investor, make sure you have a portion of your investments invested in hard assets (energy, commodity, gold, etc.) to protect against inflation.  The government can try to mask inflation, but hard assets tend to appreciate to the “real” inflation rate over time.  If you have money in fixed income investments, it is wise to remain shorter-term at this time.

Sincerely,

Your THOR Team