Let's take a brief detour from all the debt ceiling nonsense. I
want you to visit any street corner on Main Street, USA and ask
someone if the money in their wallet buys the same amount of stuff
as it once did.
Not only will their response will be the fastest way of gauging
true inflation, but it will belie the cozy figures the
government via its media puppets has been feeding
Inflation vs. Deflation
In debating inflation versus deflation, we must first ask a few
pertinent questions: Can inflation occur during a deflationary
cycle, or is this a contradictory statement? Does inflation and
deflation happen independently of one another? The answer can be
found by evaluating an abbreviated history of asset
Over the past 20 years, the government's measure of inflation,
the Consumer Price Index (
), has steadily increased, averaging a 2.5% growth rate. Since
2005, the CPI has maintained that Steady Eddie pace. Meanwhile,
major asset classes like U.S. stocks (NYSEArca: VTI), residential
real estate (NYSEArca: XHB) and commercial real estate (NYSEArca:
ICF) have declined in value.
What does this prove?
First, it illustrates that not all asset classes move at the
same velocity in whatever direction. (Doesn't this make a credible
argument in favor of diversifying one's investments? Not
interested? OK, go ahead and put all your money in Apple.) Second,
the rising cost of medical services, food, rent, i.e. (inflation)
can happen during a period of falling asset prices (deflation). And
what about the deflationary forces of declining salaries and
payrolls, while commodities prices (NYSEArca: DBC) marched steadily
upward? Doesn't it show that deflation can occur within an
inflationary cycle and vice-versa? For non-believers, the period of
2007-11 is enough proof.
While the CPI is the government's way of reporting headline
inflation, it's hardly complete. Another way to gauge the real rate
of inflation is by analyzing the U.S. dollar's buying power. Why is
this a better reference point than CPI? It's because the
destructive forces of inflation take places when a currency loses
value. It causes a corresponding rise in the cost of everyday
Let's ask a few more questions for our army of armchair
economists: What happens when a country expands its monetary base
at a rate faster than its GDP? Does it devalue the existing money
already in circulation? Don't the laws of supply and demand come
into play? When there's lots of supply, doesn't it destroy demand
and thereby cut the item's price?
What about the value of the U.S. dollar in gold (NYSEArca: IAU)?
Over the past 35 years, the dollar's value in gold has steadily
deteriorated. In 1975, you could buy one ounce of gold for $165.
Today, that same $165 dollars buys you around one-tenth the ounce
price of gold. Likewise, the dollar's buying power versus competing
currencies like the Australian dollar (NYSEArca: FXA), euro
(NYSEArca: FXE), and Canadian dollar (NYSEArca: FXC) has
Inflation and Your Wallet
Here's another disturbing question: Does the CPI measure your
personal experience with changing prices? Not necessarily. It is
important to understand that Bureau of Labor Statistics bases the
market baskets and pricing procedures for the CPI-U and CPI-W
populations on the experience of the relevant average household,
not of any specific family or individual. For this reason, it's
improbable that your experience will correspond precisely with
either the national indexes or the indexes for specific cities or
For example, if you or your family spends a larger-than-average
share of your budget on medical expenses, and medical care costs
are increasing more rapidly than the cost of other items in the CPI
market basket, your personal rate of inflation may exceed the
increase in the CPI. Conversely, if you heat your home with solar
energy, and fuel prices are rising more rapidly than other items,
you may experience less inflation than the general population does.
A national average reflects all the ups and downs of millions of
individual price experiences. It seldom mirrors a particular
At close glimpse, the U.S. government's CPI inflation is a
sub-standard measure of true inflation. Likewise, other distorted
views of inflation abound. The Federal Reserve projects inflation
of less than 2% for each of the next three years! Try to remember
that figure because it will likely come back to haunt Bernanke
& Co. along with the rest of the country.
Even though the inflation rate is up, how come it's not being
fully reflected in the government's CPI figures? Is it
because the real inflation rate is higher than what's being
projected? And if it is, how much higher isthe true inflation rate
than what's being reported? What are some ways to protect your
financial well-being against these subtle forces? ETFguide's next
Webinar titled, '
How bad will it get?'
will tell you.
As we've seen, inflation and deflation can happen during the
same time period. It's not a question of one or the other, but
rather both. And capitalizing on the next cycle, versus being a
helpless victim, will separate the winners from the losers.