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CPI Quotes from Jeffrey Hirsch

By JLP | April 20, 2011

From page 10 of Jeffrey Hirsch’s Super Boom: Why the Dow Jones Will Hit 38,820 and How You Can Profit From It* comes this quote regarding inflation:

The U.S. Department of Labor’s Bureau of Labor Statistics (BLS) has tweaked and manipulated the Consumer Price Index (CPI) so many times over the past 30 years or so in an attempt to mask inflation that the indicator may very well not detect a true upsurge in inflation in the years ahead. No one is really sure how this new and improved version of the CPI will react in a hyperinflationary environment. We may see a 40 percent to 50 percent increase in the CPI—or we may see another 200 percent rise.

From page 119 comes this:

Since September 11, 2001, through the most recent November reading of the CPI, the inflation index is up a meager 23 percent. Having made numerous trips to the market and gas station over the past decade, it is simply unimaginable that prices are only up 23 percent. Energy costs have doubled, if not tripled. Medical costs have shyrocketed.

No kidding!

He goes on…

The price of an ounce of gold (in U.S. dollars) and the New York Futures Exhcange Commodity Research Bureau (NYFE CRB) Index are better indicators of the prices consumers actually pay for daily necessities.

Since 2001 gold is up 402 percent and the CRB is up 230 percent. Much of these moves could be in response to a weakening dollar. From its July 2001 peak to the November 2009 low, the U.S. Dollar Index (USDX) had shed nearly 40 percent of its purchasing power—another strong argument that inflation is much higher than the CPI calculated 23 percent.

His hedge for inflation is stocks. Not gold or silver. Stocks.

*Affiliate Link

Topics: Books, Inflation (CPI), Investing | 21 Comments »


21 Responses to “CPI Quotes from Jeffrey Hirsch”

  1. BG Says:
    April 20th, 2011 at 12:33 pm

    There are a ton of things going down in price despite the supposed inflation:

    home values
    mortgage rates
    electronics and other imports
    and dare I say: people’s 401ks…

    There are just as many things to point at to support inflation, as there are to support non-inflation. Who’s right, dunno.

  2. Tom Says:
    April 20th, 2011 at 12:42 pm

    Based on the old methodology the CPI would today be 10%.

    To see the CPI the way it was calculated in the 80s see http://www.shadowstats.com/alternate_data/inflation-charts.

  3. Matt Says:
    April 20th, 2011 at 2:24 pm

    I fully admit that I don’t have the background in finance, but I have no idea why the price of gold would be a better indicator of consumer prices than the CPI. To me, the price of gold is a better indication of paranoia.

    And I’m with BG: there is a VAST array of consumer goods that have fallen in price. I’d also point out that while gas prices and health care costs have risen, the profits for those providers have reached record levels, too. I’d understand if their profits remained stable as prices rose; that, I could believe, would be a good indicator of inflation. But when profits increase as prices go up? That smells more like price gouging.

  4. JLP Says:
    April 20th, 2011 at 2:46 pm

    Matt,

    Oil trades on the market. Oil drillers get whatever price for oil that the market is paying. The higher the price goes, the more advantageous it is to spend more money going to get oil (oil sands, shale, etc.). So, if I’m a driller and the price for a barrel of oil goes from $75 to $110, it stands to reason that I’m going to make more money. What am I supposed to do, charge less for my oil than the market is willing to pay? Prices rule.

    It’s really no different than a person who has a college degree or knowledge that is sought after. Let’s say you had a degree that paid you $75,000. Then all the sudden, your particular degree became very important and companies were willing to pay you $300,000 because of demand. Would you be gouging?

    The way around this is to purchase stocks in these companies. You have to learn how to make money in all circumstances and quit playing the victim.

    I don’t like paying high gas prices any more than anyone else. But, our Chevron stock has gone up over 60% in the last year.

  5. Matt Says:
    April 20th, 2011 at 2:56 pm

    JLP: But what you’re describing is not inflation. Inflation is the consequence of a market being flooded with dollars, or any other event that would cause said dollars to lose value. In my (admittedly uninformed) opinion, oil is a TERRIBLE commodity upon which to judge the rise or fall of inflation: it’s a commodity whose supply is largely influenced by the political whims of the country from which it is produced, and there are a very limited number of suppliers in our domestic market.

  6. JLP Says:
    April 20th, 2011 at 3:01 pm

    Price increases and a decrease in the purchasing power of the dollar go hand-in-hand. Each dollar buys fewer goods and services.

    I was responding to your price gouging comment.

  7. Matt Says:
    April 20th, 2011 at 3:02 pm

    Oh, and by the way: I don’t appreciate being referred to as “playing the victim.” If you don’t want contrarian perspectives on your blog, feel free to institute a more refined moderation process. My belief was that you appreciated debate on financial concerns, and while you have your own personal perspective that you make clear from time to time, it was my impression that you enjoyed providing a forum and provocation for rational arguments. I’m well aware that I tend to spiritedly voice my own opinion on occasion, but I don’t see that as a reason to castigate a regular reader just because you may not agree with what they say. But, you know…your house, your rules, I guess.

  8. Matt Says:
    April 20th, 2011 at 3:08 pm

    Ok, so let me ask you, because I still don’t think this point is getting across: do you believe that oil is a GOOD indicator of inflation? It seems like that’s what you’re suggesting with the “price increases, purchasing power decreases,” etc. Do you discount entirely the possibility of collusion, a monopolistic market, or any other wonky aspects of oil trade that would be confounding factors in the price?

  9. JLP Says:
    April 20th, 2011 at 4:02 pm

    Matt,

    The price of oil impacts a lot of goods and services. So yes, I think it is a part of the indicator for inflation. I do think the government likes to gloss over oil because it’s volatile.

    Do I discount entirely the possibility of funny business in the oil trade? No, I wouldn’t say I discount entirely. Oil is an asset just like any other asset and can therefore be subject to bubbles.

    I’m sorry for calling you a victim. It’s just that when I read stuff like “price gouging” I can’t help myself. Perhaps you could explain why you believe there is price gouging and how it’s being perpetrated on the comsumer.

  10. Kirk Kinder Says:
    April 20th, 2011 at 4:59 pm

    @Matt: gold is a better determinant of inflation than CPI because gold has always kept its purchasing power. It is a store of value. Throughout time, an oz. of gold would be able to afford a person a consistent basket of goods. Certainly, there are times when the price of gold fluctuates above and below the intrinsic value of inflation, but over the longer haul it serves as a store of value. It is doing so well now because of fears of dollar debasement.

    @BG: there are always items that go up and down in price. That is the law of supply and demand. Housing had too much supply so the price is dropping. Inflation focuses on a general increase in price over the broad array of goods and services. Electronics and other consumer goods have always been deflationary, not due to the monetary base, but due to productivity.

    In fact, the government uses this productivity to keep the CPI artificially low. It is called hedonics. As an example, you buy a computer today for $1,000. You then buy one five years from now for $1,000. However, the future computer has much more RAM, memory, etc. So the government assumes this is deflationary and notes it as such in the CPI. The reality is you pay the same price, but they assume it has depreciated 30% or more.

    Finally, the housing component of CPI is flawed. They don’t look at house prices. Otherwise, we would have had double digit inflation when home prices skyrocketed. The guv looks at owners equivalent rent, essentially the rental market. This is actually increasing as more people rent than buy today. So this manipulation will come back to bite them as inflation will look much higher due to increasing rents. Of course, if this starts to happen, I am sure they will modify that component to soften the inflation number.

  11. BG Says:
    April 20th, 2011 at 5:01 pm

    Some old smart guy once said: “Inflation is and always will be a monetary phenomenon”. What that means, who knows…

    My point: prices go up and down based on supply/demand economics too. As oil prices go up, oil fields that were once un-economical will be brought online increasing the supply. But oil is a finite resource that is becoming harder and harder to suck out of the ground. Once productive oil fields (meaning cheap per barrel) are become much more expensive per barrel to operate.

    Oil may continue to go up forever, and it would have nothing at all to deal with “inflation” (ie: increasing the money supply).

    My $.02 with absolutely no economic background.

  12. BG Says:
    April 20th, 2011 at 5:11 pm

    Gold prices in January 2000: $284/oz.
    Gold prices today: $1501/oz.

    Name something else in your basket of goods that has gone up 528% in that time frame, and I _might_ start believe in the inflation theory.

    It is much more likely that either gold was under-priced in 2000, or over-priced today (or both), meaning that Gold is not the best metric to use to measure inflation.

    BTW Kirk on electronics: no doubt there is massive deflation in electronics. An Apple I-phone has more much more power than the first mass-produced mainframes, costing many orders of magnitude less, and take up a very tiny fraction of the space. There has to be something said for taking that type of deflation into account for CPI calculations…

  13. Kirk Kinder Says:
    April 21st, 2011 at 6:25 am

    BG – First, that was Milton Friedman who said inflation is a monetary phenomenom. What he was saying is as the supply of dollars increases so will inflation. This is precisely why gold has climbed rapidly over the past decade,and probably will continue to do so over the coming years as the Fed prints money like mad. As I stated before, there are certainly short term variations for the price movement but over the long term gold has held its purchasing power better than any other item, which is why it is a good measure for inflation. Gold is seen as a form of money.

    You are also missing the point on inflation. Supply and demand always control the eventual price. Inflation, as we are discussing it, is more of a rise in prices on the aggregate. Oil may be a limited good so the price goes up because of that, but using your supply/demand argument then the substitution effect should arise where we start using more natural gas, coal, nuclear, etc. However, the price for all these commodities are rising as well.

    Inflation has been happening constantly since the creation of the Fed in 1913 with the exception of the 1930s, which saw deflation (due to the Fed’s previous excessive money printing). Ask your grandparents what they paid for a car, a gallon of milk, etc.

    Also, the adjusting for productivity improvements in computers and other items should not be adjusted in the CPI. It is a factor of productivity gains, not monetary inflation, which we are talking about here. Also, if a computer costs $1000 five years ago and $1000 today, you are not paying any less for the item. Your actual cash out flow remains the same. That is not deflationary in the real world. It is disinflationary. The hedonic adjustment is a way for the government to lower inflation, but in the real world the actual cash outlay is substantially higher. The proper measure of inflation is what does it cost an individual to buy a basket of goods and services. Discounting is misleading. Should they discount the cost of health care because they have better diagnosing methods? Once you allow someone to “guess” at the efficiency, you are allowing them to manipulate. Looking at the raw costs of a basket of goods and services is the truest way to measure inflation.

  14. BG Says:
    April 21st, 2011 at 7:51 am

    “Also, if a computer costs $1000 five years ago and $1000 today, you are not paying any less for the item.”

    It more like buying a computer today for $1,000 and paying $10,000 for a similarly equipped computer five years ago. A computer that cost $1,000 five years ago, can probably be purchased for less than $100 today.

    If things like computer electronics are going to be included in the basket of goods, you can’t ignore the increased utility/power/features of items in your basket today (compared to in the past).

    Now, a box of corn-flakes is a box of corn-flakes — there is no increased utility/power/features in a box of corn-flakes today, that were not in a box of corn flakes 10 years ago. So there would be no need for modification on that item.

  15. Aaron Says:
    April 21st, 2011 at 11:27 am

    If a box of corn flakes had cost $2 in 2000, and $3 in 2011, the price would have gone up 50%. Yet if we price it in terms of ounces of gold, using BG’s numbers above (post 12) it would have cost about 7 ounces to buy 1,000 boxes in 2000, and about 2 ounces to buy the same 1,000 boxes today, a 70% decrease. So what does gold tell us about the inflationary / price change situation here?

  16. BG Says:
    April 21st, 2011 at 12:20 pm

    “So what does gold tell us about the inflationary / price change situation here?”

    I think it tells us that gold prices have gone up much faster than corn flakes prices.

    If gold was an accurate gauge for inflation, then a box of corn-flakes should cost around $10.56 a box right now — I don’t do our shopping (or eat much corn-flakes) but I think a box of corn-flakes is less than $4.

  17. BG Says:
    April 21st, 2011 at 12:37 pm

    From the original quote article:

    “Medical costs have skyrocketed.”

    I agree medical costs have sky-rocketed for me. But not necessarily because the medical providers are charging more (they probably are to some degree) — but more because my insurance company is covering much less and/or my employer is shouldering a smaller portion of the costs: hence making ME pay more.

    What changed is who is paying, not necessarily the prices themselves.

  18. Jack Says:
    April 21st, 2011 at 1:16 pm

    Medical cost are also going up in large part because medical care is getting better.

  19. Matt Says:
    April 21st, 2011 at 3:48 pm

    JLP: Just thought this was interesting…

    http://www.cnn.com/2011/US/04/21/holder.gas.prices/index.html?hpt=T1

    And Kirk, JLP: BG is absolutely right, and I still stand by my original assertion that gold is a better indicator of national paranoia than of inflation. When you have a particular public figure constantly alluding to an Impending Socialist Liberal Global Economic Meltdown, while spending his spare time pimping for a company that happens to sell gold, and he does so to an audience prone to reactionary, hyperbolic tendencies…no, sir. I don’t put much stock in gold as an effective tool for measuring inflation.

  20. BG Says:
    April 21st, 2011 at 5:43 pm

    Matt) Thank goodness that Glenn Beck with be off the air soon! Then again, it is hard to feel sorry for the suckers that watch his show (or the “News” station he is associated with).

    As Jon Stewart said: Beck was good for (the comedy) business.

  21. Blindfolded Monkey Says:
    April 22nd, 2011 at 5:48 pm

    This is a great debate. I think that throughout most of the previous decade, the steady rise in gold was an indicator of inflation and the amount of liquidity being injected into the economy. I think that right now though its huge recent rise is a function of speculative buying and it is now following the pattern that all bubble stocks and commodities follow. Once it reaches its peak and experiences its crash (as it did after its last peak in the early 80s) and we stop seeing all those cash for gold commercials on TV it may well become an indicator of inflation again.

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