Broker Check

The Weekly Update for 8/13/2021

| April 14, 2022

Three Ways to Measure Inflation

Inflation matters to each of us as it results in us paying more for the same goods and services than we did last week, month or year.

So, you wouldn’t think it would be that hard to measure, and it isn’t!  It just depends on who is doing the calculating and why.

Personally, I measure inflation based on the price increases in products and services I consume.  To fill my car with gasoline costs 45% more than last year (Source:  My annual physical, with the normal blood panel, was up close to 30% versus last year (Source: my credit card).  You get the idea, we are all paying more for about everything.  Name one item or service that costs less than last year.

If you are the Bureau of Labor Statistics (BLS) you measure household inflation via the Consumer Price Index (CPI), which was released on 8/11/2021, and up +5.40% over the last twelve months.  This measure of inflation is used to adjust our increase in the cost goods and services we buy, or Gross Domestic Product (GDP), for inflation so it is a “real” growth rate after the effect of price increases.

Last, but most powerful, is the inflation rate the Federal Reserve of the United States uses to increase or decrease interest rates.  The Fed uses the Personal Consumption Expenditures (PCE), which is also our Sign #1 of our monthly update, The Seven Signs of a Changing Economy, to measure inflation.  This month the PCE increased +4% versus last year!  The Fed’s long-standing target for how they measure inflation, and to use as their benchmark to increase interest rates, was +2%.

This raises the question of “why, then, doesn’t the Fed start their process of tapering back the stimulus to the economy from low interest rates if their target of 2% is hitting 100% higher than the target at 4%?”

In their words, because they are of the belief that the inflation we are seeing is “transitory” and caused by the world coming back online but to short supply lines.

To which my reply is, “I am not buying it”!  My household expenses are higher than both the CPI of 5.4% and the PCE of +4%.

The cause is simple, and you have read it here before, the M-1 Money Stock.  Before Covid the money floating around our economy looking to be spent or invested was $4 trillion and today it is $19.268 trillion.  That increase in buying power is a source of inflation and you and I see it, know it and feel it.

As the economy recovers, expect the inflation data to continue coming in “hot” and this will likely force the Federal Reserve to increase the interest rates before the well-intentioned timeline of 2023.  Think more like August 26 – 28, 2021 when the Fed holds its annual meeting in Jackson Hole, WY.

This meeting is followed by Chairman Powell making an outlook statement.  It is most likely going to result in an announcement of “tapering” back on the purchasing of $80 billion in  Treasury securities and $40 billion in mortgage-backed securities every month to keep interest rates low.

Possible result?  Another “taper tantrum” in the markets.  The good news is that here at The Wealth Strategies Group we have been planning and preparing for what is next for over a year.  We have a very detailed plan for our WSG family.  If you don’t have a plan, call us and we will be happy to assist in creating one for your bigger financial future.

I am interested in your thoughts, comments and observations.  Feel welcome to call, email me or just stop by the office and say hi!

Jim Lunney, CFP®


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.  To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.  All performance referenced is historical and is no guarantee of future results.  All indices are unmanaged and may not be invested into directly.