Inflation – It’s (MUCH) Worse Than They’re Telling You

If you watch TV or read the paper, you probably have heard that inflation is up.  And, they’re telling you that the most recent Consumer Price Index reports an increase of 7 percent. They might also tell you that it’s the worst inflation we’ve experienced since 1982.  So – sounds pretty bad. 

But, nowhere near does it capture the real story.  Inflation is worse.  Much, MUCH worse than 7 percent.  And, it stands to reason.  If you shut down the economy, pay people not to work and thereby radically decrease the supply of goods and services – while then at the same time, increase the supply of money by 35 percent – hmmm – might have some inflation.  And, might be a tad more than 7 percent, don’t you think?

Well, that’s exactly what has happened.   Some economists believe that the true inflation rate is more like 15 percent.  And, they also argue that if we were applying the same inflation measurement standards that were being applied in 1982, then our current rate of inflation would be approximately twice as high (bad) as we experienced back then. 

Why is the reporting so misleading?  Essentially, it comes down to politics.  You can’t trust the CPI – as an accurate measure of what is really going on in the economy – and especially in peoples’ lives.  Back in the 1980’s, there were a number of changes instituted to the way that the CPI is measured.  And, these changes were largely driven by political expediency.  In addition to the general motivation that politicians typically prefer to report lower, more favorable inflation rates, there were specific fiscal reasons driven by budget considerations – e.g. the lower the official inflation rate, the lower the ‘Cost of Living Adjustment’ that need be applied to major federal expenditures such as Social Security payments. 

Moreover, the pandemic has even made matters worse by giving more and more discretion to the people who keep and therefore report the statistics.  In the most current CPI, more than half of the statistics rely on ‘imputed’ data – rather than ‘actual’ data from the field – thus not only fuzzier and less reliable – but also much more susceptible to manipulation and political shenanigans.

So, as in investor – and looking out at 2022, the overriding assumption should be that inflation is much, MUCH worse than the media and politicians are telling you.  And, we should all build this into our assumptions as we consider our investing activities.