Inflation Is in the Eye of the Beholder

Earlier this week, the Federal Reserve loaded a new round of fodder into its money cannon, blasting $250 billion into the private sector to buy up corporate debt.

Just throw that onto the $3 trillion the Fed had already conjured up since February.

Indeed, on February 26, the size of the Federal Reserve’s balance sheet was $4.16 trillion. But as of June 10, it had soared to $7.17 trillion, meaning $3 trillion in digital money has been injected into the economy. 

And yet, I'm told, there's been no inflation, as a result. 

To the contrary, according to government statistics, the average price of goods and services purchased by Americans actually fell by about 0.7% from March to April. 

This struck me as odd because when I've ventured out of the confines of my government-imposed house arrest, I've typically found myself spending more. A lot more. 

My grocery bill has effectively doubled over the past few months.

So what's up with that?

Well, Harvard Business School economist Alberto Cavallo, one of the world’s leading researchers on inflation, has an answer...

The government is wrong.

Stop. The. Presses.

It turns out inflation is significantly higher than the government is reporting, not because they're insidious liars, but because the coronavirus has distorted our traditional buying habits and price-gauging mechanisms.

You see, inflation numbers are calculated based on the cost of a typical “basket” of goods and services. Since consumption habits change, that basket is updated annually.

However, the last adjustment to the basket occurred in December 2019 and was based on consumption data from 2017 and 2018.

Given all that's changed in the interim, those figures are clearly obsolete. 

Furthermore, many stores have been running out of certain products due to overwhelming demand. Those products are almost certainly rising in price, but since stores haven't been able to restock and sell them, their higher cost isn't reflected in the government's inflation calculation.

So, Harvard's Cavallo pooled recent credit and debit card data to better calculate what people are buying and how much they're paying for it. He then calculated the rate of inflation based on that. 

What he found was that inflation only fell 0.1% in April, a 0.6% difference from the government’s official figure of -0.7%.  And while official numbers show no inflation in May, Cavallo found an increase of more than 0.1%.

"I find that the Covid inflation rate is higher than the official CPI in the US, for both headline and core indices," Cavallo notes. "I also find similar results with Covid baskets in 10 out of 16 additional countries. The difference is significant and growing over time, as social-distancing rules and behaviors are making consumers spend relatively more on food and other categories with rising inflation, and relatively less on transportation and other categories experiencing significant deflation."

This, of course, explains the gaudy total of my last several grocery store trips — something the government data shows, as well.

Prices for store-bought food rose a seasonally adjusted 2.6% in April from a month earlier, according to the Labor Department, the biggest monthly increase since 1974.

The so-called "food-at-home index" has soared 4.8% in the past 12 months — the highest rate in more than eight years.

And market-research firm Nielsen says food prices rose 5.8% in the 13 weeks from March 1 to May 30 compared with the year-ago period. 

Meanwhile, the cost of shelter — rents and home prices — rose 0.2% in May.

Alcohol, medical care, and new cars and trucks are getting more expensive, too.

However, the rising cost of these items has been overshadowed by declines in gasoline prices (which fell 3.5% in May), hotel rooms, and airfare — things that now make up a much smaller portion of Americans' spending.

In short, the cost of food and basic necessities, and prices in general are actually rising — not contracting.

And that means the dollar is, in fact, getting weaker. Purchasing power is on the decline.

Of course, the Fed doesn't see it that way. So it's going to keep blasting money out into the abyss to prop up stocks and bonds that investors wouldn't otherwise buy. 

It's effectively adding a new layer of market distortion on top of an already distorted market. 

And so the solution for investors has to be, as we've said so many times before, to buy gold. 

With the economy still reeling, stocks simply aren't trustworthy. We could see another crash at any moment. And the Fed has made it perfectly clear that it stands ready to blast away with its money cannon at even the slightest prompting.

It'll do this while telling you inflation is subdued, though your grocery bill will tell you differently. 

So, too, will the price of gold, which is up 17% in the past six months, and 28% in the past year.

That's why I'd strongly recommend you check out Gerardo Del Real's latest report on gold-buying.

The editor of Junior Mining Monthly explains a market loophole investors can exploit — so-called "Tier 2 Gold."

This market loophole lets investors buy Tier 2 Gold for as little as $23, $15, or even $12 per ounce.

That makes it an invaluable resource for people who want to protect their money. 

So check it out here.

Fight on,

Jason Simpkins

@OCSimpkins on Twitter

Jason Simpkins is Assistant Managing Editor of the Outsider Club and Investment Director of Wall Street's Proving Ground, a financial advisory focused on security companies and defense contractors. For more on Jason, check out his editor's page. 

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