“Spring Charts” is a series of current financial topics explained in dots, lines, and only a few words – just the right “mix” to concisely convey ideas for critical thinking about investing.
Of course, you have heard the tales of “gripping” inflation and how the prices of daily goods have moved from cents to dollars over several decades, mostly spanning the lifetimes of our grandparents. Per official data, today’s inflation readings are a nonissue, with consumer prices having risen an insignificant 0.9 percent year-over-year (March 2016). The reality, however, is a different one, leaving many Americans subject to “galloping” price increases, regrettably related to the cost of essential items such as education, healthcare, and housing.
Economist John Williams, creator of ShadowStats, has shown through his work that current inflation is understated by nearly nine percentage points, mainly as a result of a constant reconfiguring of the Consumer Price Index (CPI) that has occurred since the early 1980s. As the CPI is also used to adjust retirement benefits, Williams (unsurprisingly) continues to find critics of his approach.
Another alternate measure of inflation, the Chapwood Index, confirms Williams’ theory, showing price increases in 50 major U.S. cities based on the 500 items Americans spend most of their money on. The five-year average of the index reveals a grim picture, with inflation running in double-digit territory, rather than the downtrend measured over the same period by official sources.
Through our own work, we believe the above concerns are valid, and consumers as well as investors need to “bypass” official readings in their decision-making. Inflation has found other “outlets,” as reflected in most asset prices, including equities and real estate, while deflation continues to impact growth in the global economy. It may also be for this reason that equity markets are accepted to trade at a premium vs. their long-term price-to-earnings measures, since real assets should provide basis for protecting purchasing power (at least by conventional perception).
Matthias Paul Kuhlmey is a Partner and Head of Global Investment Solutions (GIS) at HighTower Advisors. He serves as wealth manager to high-net-worth and ultra-high-net-worth individuals, family offices and institutions.