Inflation Is A Lie - Here’s What You Need To Know

January 23, 2018

Inflation Is A Lie – Here’s What You Need To Know

  • Inflation is different for each individual, and it’s probably higher than reported for the majority of us.
  • It isn’t in the interest of any government to have higher inflation as many payments would have to be adjusted, from pensions to salaries.
  • The key is that you have to invest by keeping the real and not the reported inflation in mind.


What we’ve been looking at for the past 35 years is an environment with declining and low inflation. However, that’s because inflation is usually represented by only one number which is calculated in a distorted way and has to comprehend many various factors of which each impacts us differently.

Figure 1: Inflation has been declining for the past 35 years. Source: FRED.

If we change our perspective on inflation, we can see that the truth is much different than what the Bureau of Lies and Spins, sorry, the Bureau of Labor and Statistics shows us in their reports.

What’s important to understand, and to adjust your financial decision making accordingly to, is that inflation is low but very different among various items. Today, we are going to discuss inflation from various perspectives in order to give you a better financial planning platform when investing as inflation is a key component of investing returns, if not the main one.

Inflation Is Very Different Across The Board

Inflation impacts you very differently if you live in New York, save for your kids’ tuition, or are retired. Therefore, it’s important to understand how inflation is different across its various components.

The year-over-year change in inflation shows how energy and rents have really increased in 2017, but airlines flights and wireless have declined. Now, if you pay rent, use little internet, and don’t fly, you are impacted differently than someone who lives in a small home, travels a lot, and rents out real estate.

Figure 2: Inflation is different per segment. Source: JP Morgan.

If we take a look at things from a long-term perspective, the story is even more impactful. In the last 40 years, the cost of education has increased 13 times while reported inflation has only increased 4 times.

Figure 3: Inflation and tuition costs. Source: FRED.

If your goal has been to provide for your children’s education, higher tuition costs have been a negative surprise.

Now, if you are young and have been saving to pay for that down payment and buy the home of your dreams, you probably have given up on that dream and have instead bought something else and somewhere else.

Figure 4: Home prices for Detroit, Austin, and New York. Source: FRED.

Home prices have doubled in New York (brown) and Detroit (grey), while they have quadrupled in Austin (blue) in the last 20 years.

What’s even more important for many are healthcare costs. Healthcare expenditures per capita have almost doubled in the period from 2000 to 2014.

Figure 5: Healthcare expenditures per capita. Source: FRED.

However, if we look at the formally reported healthcare inflation, it has increased only 45% in the same period.

Figure 6: Healthcare index. Source: FRED.

The reason for the difference in healthcare spending and the reported price index comes from the quality adjustment made by the Bureau of Labor and Statistics. As healthcare has improved, the Bureau of Labor and Statistics estimates that the quality has improved too and that is why it doesn’t really cost more, you should be getting more for more. That’s why the formal price index hasn’t actually gone up as real prices have. Nevertheless, if you look at how much you have to pay, you pay much more and the life expectancy hasn’t really improved over the last decade.

Another example, if the price of a computer is $1,000 and next year is $1,050, inflation should be 5% but not if you adjust the price for the technological improvements which could be in the form of higher memory or a better screen. This is called Hedonic Quality Adjustment.

So prices go up, but those increases aren’t actually reported. Why? Because the government has to adjust a whole bunch of payments to inflation and it would be impossible for it to keep up with that if they took into account the real inflation. So they have the Bureau of Lies and Statistics which produces the necessary numbers, the lower the better.

Lower inflation allows for lower interest rates and higher debt levels which allow for more spending and more votes, even if the same voters are tricked by the same government that provides the false numbers. This isn’t related to any political stream and it doesn’t really matter who is governing, it’s about politics itself.

However, instead of looking at inflation from the perspective the government wants us to have, we can look at it from the other way around, from the money supply. Money supply has increased 8 times in the last 35 years while the consumer price index has increased 2.7 times.

Figure 7: Money supply (blue and left) and inflation (red and right) – don’t be confused by the difference scales. Source: FRED.

Apart from the above, if we measured inflation by the same methodology that was used in the 1980s, which excludes all consequent adjustments, inflation levels would be, or are, much higher than you’d imagine and about 3.5 percentage points higher than officially reported.

Figure 8: Inflation is much higher than officially reported. Source: Shadow Government Statistics.

The 3.5 percentage points higher yearly inflation is exactly what is reflected in tuition, technology, healthcare, real estate, and stock prices.

So the three take aways are that inflation really impacts each of us differently, the real inflation is much higher than reported due to alleged quality adjustments as price increases are much higher, and the money supply has exploded when compared to prices.

How To Invest

In such an environment, it’s important to understand that just to protect your capital, you need a return of about 6%, not 2%, per year. Further, as stock prices have exploded in the last 35 years, you really need to invest much more into your pension, thus there is another indication of inflation: retiring costs a lot more today than it did in the past.

Thus, if you don’t want to hold the bag, you have to look at investments that can offer protection from inflation and, why not even upside. Thus, we have to look for companies that have the potential to increase prices, thus with large moats or fixed supply. This could also be real estate which is in fixed supply. Commodities look really well positioned for the next decades as sooner or later, that money supply expansion is going to explode in other sectors, not just asset prices.

Those who invest now in stocks and bonds with an expected return of 3% are in for a nasty surprise in the next 20 years, even if the returns actually end up at 3% or even 4%.

By Sven Carlin Inflation Investiv Daily Share: