Actual Inflation Running Between 3-4%

It is important, when viewing the U.S. Government’s Consumer Price Index (CPI), to understand that the CPI tracks consumer spending and not the cost of living. According to an article in Barron’s this past weekend, the current CPI basket includes prices of 71,000 goods and services -- and doesn’t resemble the consumer basket of goods and services from prior decades. Both the calculations and the selection of data itself have undergone many changes, and in our opinion many of these changes have been done to report a more modest rate of inflation.

The CPI is based on data collected from spending surveys given by the U.S. Bureau of Labor Statistics to approximately 14,000 urban families. Among the 71,000 items the CPI includes other expenditures, such as recreation, insurance, taxes, personal care services, entertainment purchases, and consumer electronics. The Bureau of Labor Statistics also periodically alters the contents of the basket, making adjustments to the weighting of the components, and smoothing seasonal patterns. Such tinkering with data, as we have mentioned over the years, usually results in an understatement of the inflation rate and creates an unreliable, misleading cost-of-living index.

Guild Investment Management has long believed that the existing indices used to measure cost of living changes in the United States are inadequate.

The Guild Basic Needs Index™ (GBNI) concentrates on four categories of primary and essential living needs: food, clothing, shelter, and energy (which is needed for heating, cooking, and transportation). The categories and their values within the GBNI are fixed. There is no seasonal adjusting, smoothing, or replacing of components. This past weekend’s Barron’s discusses CPI adjustments over the decades and suggests that tracking inflation over a long period of time with a basket that frequently changes is like comparing apples to oranges. The point they make is that CPI data going back to the 1940s doesn’t relate to today’s CPI data, as people are consuming completely different goods and services.

Our GBNI on the other hand will not change as it represents items that people have been consuming for many generations. The Barron’s article also suggests that there is logic behind adding items to the CPI as they become significant parts of the consumers’ purchases. For example automobiles were added in 1935, air conditioners in 1964, and cell phones in 1998. While these items may be significant purchases, they don’t represent the basic essential needs which we are tracking in our GBNI. Adding new items to an index that tracks consumer spending makes sense, but we maintain that some of the other manipulations to the CPI calculation over the years are harder to explain.

The modifications to the CPI introduced in the late 1990s, according to the article, suggest that inflation might be understated by 1.3 percentage points per year. Therefore the calculation of 1.8 percent inflation over the past year could actually be closer to 3.1 percent -- and going by our chart below -- the CPI calculation of 2.5 percent since January 1, 2000 would actually be 3.8 percent.

To learn how to receive the full premium commentary, please click the following link: gold subscription.

About the Authors

Chief Investment Officer
guild [at] guildinvestment [dot] com ()

tdanaher [at] guildinvestment [dot] com ()