Before making an investment decision, every investor should understand what constitutes true inflation. Currently, inflation is measured using a floating basket of goods in the Consumer Price Index (CPI), which continues to understate true inflation.
Two tools for determining true inflation figures are John Williams’s Shadow Statistics and the Chapwood Index. Williams, a renowned economist, provides excellent insights about the severity of misstated inflation rates. Using a fixed basket from 1980 to compare to today’s prices determines that inflation is 9.46%, not 1.75% as represented by the CPI.
Here’s an example that affects investors daily: Assuming inflation is held at 2% (as desired by many economies), a bond yielding 3% would return 1% after the effects of inflation were taken into consideration. However, using Williams’s true measure of inflation (9.46% today), an investor would quickly realize that they are losing 6.46% in annual purchasing power by holding onto the bonds. Understanding the true effects of inflation could be the difference between capital gains and capital losses for your portfolio.
The Chapwood Index measures real cost of living increases; it calculates the top 500 items Americans spend their after-tax dollars on in the 50 largest US cities. It reports actual price increases with no seasonal adjustments and focuses on real price changes. The average inflation rate among those cities determined that true inflation is 10.7%, much higher than the 1.75% reported by the CPI. As in the previous example, investors are losing purchasing power by holding onto investment vehicles with yields lower than 10%. Up for discussion: gold is not just a disaster hedge; gold’s performance in world currencies has averaged over 10%/year since 2000 and has outperformed Warren Buffet’s Berkshire Hathaway. Gold is now poised to go much higher. When I wrote $10,000 Gold: Why Gold’s Inevitable Rise Is the Investor’s Safe Haven in 2013, I felt like a lone wolf in the wilderness with my prediction. Today, Pierre Lassonde has predicted $25,000 gold, and Jim Rickards $40,000 gold. If 5% of investors in financial assets ($300 trillion) decided to allocate to bullion, that would equate to $15 trillion of demand. Since mine supply has been in decline, and it takes about 20 years to bring a mine from discovery to production, the only way you can divide $15 trillion into $1.64 trillion of above ground bullion is for the price to go up to $11,500/oz.