From Anthony Mirhaydari’s 5 lies the economists are feeding us comes the following commentary on inflation:
Of course, there is also the question of whether economists are even properly accounting for inflation. Right now, the Fed’s preferred measure — the core personal consumption expenditure price index — is rising at just a 0.8% annual rate.
You probably feel like inflation is much higher than that piddling number. That’s because the core rate excludes rises in food and energy prices. Don’t you wish you could just exclude those price hikes from your household budget?
The reasoning behind the exclusion is that these volatile necessities won’t keep going up over the long term. Economists assume food and fuel inflation will be “contained” — just as rising mortgage defaults and foreclosures were “contained” to subprime borrowers back in 2007.
The latest Beige Book report of economic conditions, produced by Fed researchers, suggests otherwise. The report noted that nonwage input costs are increasing and that “(m)anufacturers in a number of districts reported having greater ability to pass though higher input costs to customers. Retailers in some districts mentioned that they had implemented price increases or were anticipating such action in the next few months.”
There’s more. The ISM manufacturing and nonmanufacturing prices-paid indexes have surged to levels not seen in three years. Crude material prices are up a massive 52% over the past three months, even if you exclude food and fuel. Inflation is spreading and becoming entrenched in the supply chain for all goods, despite assurances to the contrary.
To get a clearer picture of what’s really going on, we turn to John Williams of ShadowStats.com. He holds the official data in low regard and earns his living ironing out wrinkles in the government’s economic statistics. By reverse-engineering changes to how metrics like unemployment and inflation are calculated, Williams believes investors can get a truer picture of what’s going on. It’s not pretty: His inflation measure is riding at a 9.1% annual rate.
I guess everyone will have to decide for themselves whether they think their personal experience with inflation is closer to the Fed’s preferred measure of 0.8% or whether it is closer to John William’s measure of 9.1%. If you are buying gas, food, health insurance, or paying for a child’s college tuition I suspect your answer will be closer to the latter. Preserving purchasing power should be part of every discussion that financial advisors have with their clients. Clearly, sitting in cash or cash equivalents is not risk-free.
Posted by Andy Hyer 
