Inflation in the United States was reported at 8.6% on Friday as per the Consumer Price Index (CPI), the fastest year-over-year growth in over 40 years.
According to the CPI report, gasoline is up 50% from a year ago. The cost of groceries has increased 11.9% in the same time frame.
It's getting harder and harder for individuals and businesses to adapt to the always-changing economic environment.
The worst part is the data comprising CPI isn't even reporting the full story, causing many small business leaders to make important economic calculations based on faulty data.
What is the Consumer Price Index (CPI)?
The U.S. Bureau of Labor Statistics (BLS) defines CPI as "a measure of the average change over time in the price paid by urban consumers for a market basket of consumer goods and services".
CPI was historically calculated by measuring the increase in price of various goods over time. If a product cost $1 a year ago and now that product costs $1.05, inflation would be expressed as 5%. Nice and simple.
However, in the 1980s, the CPI metric began to change as the BLS attempted to "more accurately measure inflation".
The "New" CPI
The truth is, in the last 40 years, the market basket has been cherry-picked by politicians and government bureaucrats to underreport inflation.
The changes to the market basket assumed that, as inflation increases, people would stop buying the products they truly desire in favor of lower cost, lower quality goods...AND BE OK with it!
Instead of including the original desirable good in the market basket, the BLS began substituting desirable goods with lower cost, lower quality goods.
Why measure the rising price of a juicy wagyu ribeye steak when you're good with a soy burger made in a lab? 🤮
As long as desirable scarce assets (beachfront property), foods (wagyu steaks 😋), and energy are left out of the market basket, inflation as measured by CPI is nothing but a metaphysical abstraction.
What's your aspiration?
The definition of inflation is a personal one that comes down to one simple question:
What's your aspiration?
My rate of Inflation is different from yours because we have different aspirations.
Inflation is essentially a vector with many different market baskets.
There's a market basket of goods and services that's deflationary. There's another market basket going up 3 to 5%. There's another one going up 7 to 10%...and on and on.
Ultimately, if you aspire to create and preserve wealth, your best surrogate for inflation is the rate of M2 money supply expansion.
What is M2 Money Supply?
Investopedia defines M2 as "a measure of the money supply that includes cash, checking deposits, and easily-convertible near money".
The expansion of the M2 money supply is a proxy for asset inflation, which you can also call the cost of capital. It is followed closely by business leaders and investors when calculating hurdle rates and risk premiums.
The Real Rate of Inflation
M2 has expanded by just over 40% since Covid shook the global economy in March 2020.
This means if a bond, stock, or any business in the market hasn't grown its cash flows by more than 40% in the last 26 months, it is losing value.
This means if you own an investment property and it hasn't yielded rental income greater than 40% since March 2020, you are not holding value.
In Closing
Everyone is surging to acquire hard assets.
The hard asset supply hasn't expanded as fast as the money supply, which is why asset prices have skyrocketed in the last two years.
In an inflationary post-Covid global economy, you have to own scarce hard assets if you wish to preserve your wealth and purchasing power.
Which assets are right for you? Therein lies the work.
As always, stay alert, stay educated, and most importantly stay cool.
Talk soon,
Old Man Winter
