The Fed Thinks You’re Dumb…
Inflation is picking up.
However, the pace of inflation is worse than traditional inflation gauges like the Consumer Price Index and Producer Price Index suggest.
The latest CPI numbers from the Labor Department show the ‘core’ inflation rate — minus food and energy — increased by an unthreatening 2.1% in October.
But if you were to ask your everyday American, I think most would say inflation is running much higher.
What accounts for this difference between the reported inflation rate of CPI and the perceived rate of inflation?
The answer is the CPI doesn’t included important asset prices, such as real estate and stocks.
What would happen to the rate of inflation if the bean counters in Washington included asset prices in the inflation calculation?
Well, we now have an answer.
The Federal Reserve Bank of New York introduced a new measure of inflation in 2017 called the Underlying Inflation Gauge (UIG), which does include theses asset prices.
“The design of the UIG is based on the premise that movements in trend inflation are accompanied by related changes in the trend behavior of other economic and financial series,” said the NY Fed.
In short, UIG recognizes there’s more to inflation than consumer/producer prices. The asset prices of things like stocks and real estate are just as important to your cost of living as milk, eggs, and gasoline.
Ask anybody looking to buy a house and they’ll tell you the same.
The New York Fed believes UIG has a better track record than CPI and PPI at forecasting inflation.
“The UIG proved especially useful in detecting turning points in trend inflation and has shown higher forecast accuracy compared with core inflation measures,” boasted the NY Fed.
I tend to agree.
And as the above chart shows, inflation according to the UIG at 3.1%, is more than 50% higher than CPI index of 2%.
This is worrisome.
The UIG is not only higher than CPI, it’s also steadily rising, showing us inflation is actually accelerating to a level well above the Fed’s target of 2%.
What’s this mean to you?
- The government’s is grossly underestimating the rate of inflation.
- Inflation’s already here but thrives most largely in asset prices.
- The Fed needs to raise interest rates faster and higher than expected.
Another problem is the fact that the Fed’s easy money policy has created an air pocket under asset prices making them more susceptible to a sharp decline.
You’ve already seen that with stock prices in the last month.
And once inflation gets a foothold in our economy, it’ll be very hard to kill off. Remember the term “cost push inflation” of the 1970s?
The Fed isn’t raising interest rates fast enough and inflation is worse than the traditional inflation gauges suggest. What should you do as investors?
- Don’t own long-term bonds, inflation will crush your yields.
- Make sure you include a meaningful allocation of gold in your portfolio.
- Build cash to take advantage of stocks when they get cheaper.
And MOST IMPORTANTLY…
Don’t listen to the government’s misleading inflation numbers.
They want you to believe massive money printing and deficit spending aren’t stoking the inflation fire.
How dumb do they think we are?
Here’s to growing your wealth,
Chief Income Expert, Mike Burnick’s Wealth Watch
Editor’s note: The best way to beat inflation? Having a lot of money of course.
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