Inflation is generally described as a measurement of the rate prices increase over time. Our government uses the Consumer Price Index (CPI) to quantify that measurement. The trouble is while we’re told that inflation is low, it’s hard to square that with our experience out in the marketplace. Based on that, it certainly seems that our leaders understate price increases.
We see this when we go to the grocery store. Have you noticed how the prices have gone up? Sometimes the prices stay the same and the container shrinks. When cereal boxes and cans of tomato sauce shrink by 25% and stay the same price, that sure seems like a price increase. Many of us don’t eat out at restaurants like we used to, but those prices have really gone up. Pizza used to be a cheap option, but now a regular pie costs about $20 – and it shoots beyond that if you want more than just cheese on it. We feel inflation elsewhere too.
The cost of health insurance is one thing, but the increase in deductibles and other out-of-pocket expenses also boost our medical costs. Think about the regular things we buy – from dog food to movie tickets to internet – it certainly seems like costs have gone up by more than 1.4%.Then the question is whether wages keep pace with these real increases. Not usually. Social Security generally makes only modest COLA increases – when they increase it at all.
And of course, our government contributes to all this through its addiction to printing money. Placing more money in circulation without a corresponding increase to GDP results in less value per dollar. That sounds like inflation. It doesn’t seem to matter which party is in power, our government has been printing money like crazy. And they need inflation to remain low to keep the deficit and the debt from going completely out of control. While it is controversial, Ed Butowsky has developed his own method of observing the change in prices using what he calls the Chapwood Index. This index measures prices of various items we all buy and it is calculated on the city-by-city basis since price increases vary a great deal in different parts of the country. Bottom line: He suggests the real rate of inflation varies but is closer to 10% than 1%.
What does this mean to us as investors? It sure seems the true rate of inflation is being masked. At Brixton, our interest is to develop 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. We can help direct you through the planning and investing process.