Commentary: Week of March 28, 2022
Inflation is a political lightning rod. As a result, there is a good deal of misconception around it. The Consumer Price Index (CPI) is up 7.9% from a year ago and will likely peak in the 8.5 – 9.0% range sometime in the next couple of months, the highest since 1981. Politicians can blame war or COVID all they want, but the simple explanation is – there is just too much money creation.
Others think inflation will be temporary and point to “core” inflation, which looks tamer. Core prices, which exclude the normally volatile food and energy sectors, are up 6.4% versus a year ago and will likely peak near 6.5%.
There is a reason to exclude some prices when there are very special factors at play…but food and energy prices have been going up for over a year. And just because more of the inflationary impact of the surging M2 measure of money (up more than 40% since the start of COVID) shows up in food and energy prices, or even used car prices, is NOT a reason to NOT count them.
Others argue that the government is grossly underestimating inflation and is hiding the scope of the problem. One on-line analyst says that if we used the pre-1980 methodology to measure inflation it’s already running north of 15%.
But there are serious problems with this analysis, as well.
- First, the same method suggests inflation has been running close to 10% per year on average since 2000. This is bonkers. If inflation really had been running close to 10% per year, a true measure of real GDP growth would show the US to have been in recession since 2000. Seriously?!?
- Second, why would anyone use the basket of goods and services that Americans were buying in 1980 to measure inflation today? Energy used to be a much bigger share of our spending. Meanwhile, smartphones, by themselves, have replaced spending on a wide variety of products and services. Stereos, records, video recorders, radios, landline phones, clocks, watches, maps, cameras, calculators,…etc. The list goes on and on and keeps getting longer. Today, even poor Americans have access to products and services that the wealthy of prior generations never could have bought at any price.
- Third, yes, the government has changed the way it measures home prices, but it’s for the better. When people buy a home they are buying an asset, just like when they buy stocks or land. The CPI is designed to measure the cost of consuming goods and services, not the cost of possessing an asset. When it comes to home inflation, the government changed the measure to look at rents, not the price at which homes are sold, because rents are the cost of consuming the value of homes.
The government figures for inflation are not perfect. The main ones are the CPI, the PPI, and the PCE Deflator (the Fed’s favorite!). All of them measure slightly different things and so the numbers are different, as well. But the inputs and methods to make these calculations are publicly available. There is not a conspiracy to dupe the American people. And every government measure of inflation is up. It’s pretty clear the Fed is going to have trouble wrestling inflation back down.
All My Best – jtk
(For transparency, I did not write this. Brian Wesbury and his team authored it. He is an economist that I hold in high regard.)
Not a client and have questions? No worries, there’s no obligation. Click HERE to schedule a pressure-free meeting. You’ll likely hear things that you’ve never heard before. It will definitely be worth your time.
Clients can always call me or click HERE for a convenient time to talk or meet.
DISCLOSURES
* This newsletter and commentary expressed should not be construed as investment advice.
* Government bonds and Treasury Bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of fund shares is not guaranteed and will fluctuate.
* Corporate bonds are considered higher risk than government bonds but normally offer a higher yield and are subject to market, interest rate and credit risk as well as additional risks based on the quality of issuer coupon rate, price, yield, maturity, and redemption features.
* The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. You cannot invest directly in this index.
* All indexes referenced are unmanaged. The volatility of indexes could be materially different from that of a client’s portfolio. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. You cannot invest directly in an index.
* The Dow Jones Global ex-U.S. Index covers approximately 95% of the market capitalization of the 45 developed and emerging countries included in the Index.
* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.
* Gold represents the afternoon gold price as reported by the London Bullion Market Association. The gold price is set twice daily by the London Gold Fixing Company at 10:30 and 15:00 and is expressed in U.S. dollars per fine troy ounce.
* The Bloomberg Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.
* The DJ Equity All REIT Total Return Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.
* The Dow Jones Industrial Average (DJIA), commonly known as “The Dow,” is an index representing 30 stock of companies maintained and reviewed by the editors of The Wall Street Journal.
* The NASDAQ Composite is an unmanaged index of securities traded on the NASDAQ system.
* International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.
* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.
* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
* Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
* Past performance does not guarantee future results. Investing involves risk, including loss of principal.
* The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee it is accurate or complete.
* There is no guarantee a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
* Asset allocation does not ensure a profit or protect against a loss.
* Consult your financial professional before making any investment decision.
SOURCES
March 28, 2022 – First Trust Monday Morning Outlook by Brian S. Wesbury
