Why Ugly Inflation Is Showing Up Everywhere Except in CPI Numbers

Inflation is Showing Up EverywhereAccording to the U.S. Bureau of Labor Statistics (BLS), between February 2014 and January 2015, overall prices in the U.S. economy declined by 0.1%. (Source: Bureau of Labor Statistics, last accessed March 5, 2015.) In 2014, inflation ran at the slowest pace since 2008.

When I look at these statistics, I can’t help but ask myself, how is this possible? Something seems very wrong. Aside from gas and housing, I see inflation everywhere.

Food Prices Remain Elevated

In the same period the government tells us deflation happened in the U.S. economy, food and beverage prices increased by more than three percent. (Source: Federal Reserve Bank of St. Louis, last accessed March 5, 2015.) The cost of meat, poultry, fish, and eggs increased by 7.3% between February 2014 and January 2015. (Source: Federal Reserve Bank of St. Louis, last accessed March 5, 2015.)

And it’s not just food prices increasing. We saw inflation in medical care, education, communications, and other goods and services.


Why isn’t government data showing inflation?

The answer is simple: When calculating inflation figures, the government places a significant amount of weight on housing—this includes rent. Rent doesn’t usually see a large year-over-year price increase. To offer some perspective: in calculating the consumer price index (CPI), the BLS puts a weight of 42 out of 100 on housing. (Source: Bureau of Labor Statistics, last accessed March 5, 2015.) This makes housing the biggest component of the CPI. So, if housing lags, inflation lags in the official numbers.

Inflation Bound to Skyrocket

I am worried about how bad inflation will be in the future because of all the new dollars created by the Federal Reserve since the Credit Crisis of 2008. Please look at the chart below. It shows the increase in money supply in the U.S. economy.

Money Supply Chart

Chart courtesy of www.StockCharts.com

Since 2008, the money supply has increased by 67%, or more than $5.0 trillion.

What does this increase mean?

When there’s too much money in an economy, its value declines. This results in inflation and rising prices, because it takes more money to buy something.

What to Expect Going Forward with Inflation?

Right now, the mainstream is sold on the idea that deflation will occur in the U.S. economy and that rising prices will not be a problem. The data, if you closely look at it and remove the heavy housing component of the CPI, suggests the opposite. Inflation is present, especially in food where we see prices rising the most.

While inflation doesn’t seem like a big problem right now, in our studies of history, we have yet to see a country that has printed massive amounts of its paper money and hasn’t ended up with rising prices and rapid inflation as a result.

While the precious metals sector continues to look depressed, I can’t stress enough the opportunity I believe the metals are providing for investors. Five years from now, when inflation is a mainstream problem and interest rates are sharply higher, we’ll look back at the 2013–2015 period as the days of golden opportunity in the metals.