We’re continuing with our discussion about incorrect inflation and gold in this article.
U.S. CPI data shows a significant increase in inflation since the 1970’s as displayed in the graph below.
Source: U.S. Department of Labour
But even though something clearly has happened with CPI growth we are still hearing reports about inflation not being very high. Official numbers actually show it being in the low single digits. This seems to contradict what regular people on the street are experiencing, where the consensus view is that prices on close to everything is increasing. The question is why?
CPI, or inflation, can be measured in different ways and sometimes the measurements change – at the discretion of the government. Comparing the CPI number based on the methodology used by the U.S. government prior to 1980 with today’s official CPI numbers reveals some very interesting differences – as illustrated by the graph below.
Official U.S. inflation is below 2% today and the alternate inflation methodology displayed in the graph above puts in closer to 10%.
Can inflation really be that high?
As we discussed in the first part of this article it will vary depending on your own lifestyle, but needless to say most people have a hard time coming to terms with a 2% inflation rate when they’re getting less and less for their money. Independent surveys put the perceived rate of inflation in the U.S. closer to 4-6%.
So once we ascertained that inflation is higher than official data shows, two questions come to mind. Why is that and what impact does it have on you?
There are many reasons for the government to prefer lower inflation numbers. Part of it has to do with confidence in how an economy is run. A sky high inflation rate signals that something is amiss. It also has to do with costs as many benefits etc. are indexed to CPI. A high CPI growth thus means higher costs for the government and vice versa. At a time when many developed, as well as emerging nations, are heavily indebted it’s not far fetched to assume that there is an interest in keeping costs down, maintaining faith in the currency and keeping interest rates low.
This all means that your fiat money is loosing its value at an ever increasing pace. Inflating away debt, which is what most governments are doing, is a stealth way of stealing your money. It doesn’t affect the rich as much as it does the poor and middle class – who are loosing purchasing power, having to spend more and more on food, transportation etc. – without the means of benefiting from rising asset prices.
When it comes to investments and savings you will have to pay attention to what the real rate of return is. This will have a serious impact on your wealth.
Most interest rate investments give a negative real return today. For example, the 10 year U.S. Treasury yield is 2.50%. If inflation is running at 4-6% it means you are loosing money.
Stocks are overall performing well currently, but they are very volatile, moving 5-20% in single trading session – so capital gains is not a sure thing. Dividends may in some cases be above the inflation rate but picking the right stocks and keeping them for the long term is not that easy.
That leaves us with gold and silver bullion, which for centuries have preserved value and protected purchasing power.
Given how worrisome most economies look today there is no reason for why you shouldn’t consider buying gold and silver bullion or adding to your holdings. Especially, since prices recently have dropped to levels that again look attractive.
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