It’s been known for quite sometime that the Consumer Price Index (CPI) is not a reliable measure of monetary or actual inflation in the economy. This Forbes article from 2014 explains that “the CPI is not a measurement of rising prices, rather it tracks consumer spending patterns that change as prices change. The CPI doesn’t even touch the falling value of money. If it did the CPI would look much different.” CPI is regularly manipulated by the U.S. Bureau of Labor Statistics and is inconsistent with Federal Government’s own definition of inflation.
What’s worse, however, is that last week the Biden Administration, including President Biden, decided to mislead the public on how inflation actually impacts us. By claiming that inflation was zero in July the White House either lied or displayed a gross lack of financial literacy.
A local friend of ours is a retired professor of economics from a prominent university in California. When I asked him about this he responded first by saying:
• There is the price _level_. Then there is the _change in_ the price level (first derivative with respect to time, to be technical). We call that the inflation rate. (8.5% in July, a positive number). Then there is the _change in the change in_ the price level (second derivative with respect to time.) It’s THAT number that went down. Biden is confusing the second derivative with the first derivative. So, I guess he could have said, “Praise the Lord! There was deflation in the rate of inflation. At this rate, we will have zero inflation in about a year from now.”
In a second email he was a bit more colloquial:
• Or, to put in more understandable terms, suppose he’s driving his beloved Corvette at 95 mph, and he decelerates to 85 mph. That’s still driving at breakneck speed. But it sure as hell ain’t stopped.
As someone who advises people on financial matters it’s helpful to understand some basic economic facts of life. One of the concepts is the Rule of 72. The Corporate Financial Institute explains this rule of thumb as follows:
• The length of time required for an investment to double in value at a fixed annual rate of return.
Conversely, it can also tell us how long it will take for money to be worth half of what it is today. At 8.5% CPI, your dollars will only be worth fifty cents in 8.4 years. If monetary inflation is greater than CPI (highly likely) the picture darkens. This means that at the current rate of inflation you’d have to invest your money at 8.5% just to stay even.
In recent weeks the Federal government has engaged in the Orwellian concept of “newspeak”. The redefinition of recession several weeks ago and now their desire to mislead us pertaining to the impact of inflation on our everyday lives. Let’s not fool ourselves or allow ourselves to be taken for fools. Governments spending money we do not have (by printing it at will) is stealing it from us by making our savings and investments worthless. This is just another form of wealth redistribution, and we need to be mindful of it.