What if there really is inflation and we’re just not looking at it?

Something I’m rather concerned about for the past few months is inflation. There’s a large camp of economists and finance people who believe that inflation is nowhere near ready to rear its ugly head in the USA.

I’d like to believe that, but the bulk of my time is being spent in the trenches of this economy with everyone else – certainly not wondering if I should buy a summer home in addition to my Georgetown brownstone or waiting for a private jet to somewhere tropical. 

From what I’ve read, the Consumer Price Index (CPI) is trotted out to explain that inflation is not an issue. Sure enough, FRED shows us a nice, orderly line of conservative growth.

Completely orderly. No problems here, right?

But what if this issue is more of a question about the difference between a mean and a median value? 

For background, the main CPI is a basket containing a number of prices from a variety of products and services from buying a home to paying for a matinee or getting a Coke. These are all brought together and weighted into an average of all the prices that a consumer would see. In normal times, most of these prices would tend to move together. That would mean looking at the average of all these prices makes for an easy shorthand for inflation in the economy.

In light of this, I’d posit that these are not normal times. Interest rates are as close to zero as the USA has ever seen. The Fed is pouring money into the economy at a rate we’ve never really seen before and part of that program is buying up collateralized loans. What effect does this have on the economy? 

It makes loans easier to get and banks don’t have to hold them so they may not be caring if the loans are good bets. That means more people are getting loans and the low rates mean they can afford more than they have in the past. There’s a bidding war with more buyers competing for the same amount of goods. Prices go up. Inflation. 

Not all prices are going up, though. People (hopefully) are not taking loans out to buy food, beer, electricity, Netflix or pay rent. Due to the pandemic, going out on the town isn’t really happening, either. These prices aren’t seeing similar massive inflation. Maybe there’s enough of these prices that they can average out other activities to make the CPI look normal?

If we instead look at things that you get loans for in the USA, like cars, houses and even durable goods, the picture is different, according to FRED. 

Here is the breakout data, again from FRED and graphed as percentage change over time in a rolling average to reduce the normal fluctuations month over month.

These graphs look like price inflation to me and it looks like a relatively recent and scary development. 

This is the same data only summed over time to show the cumulative effects of the changes. Even more crazy, huh?

Now, I admit that I’m only sitting on an MBA for guidance, so I could be wrong, but I worry that the Fed and the government are not looking at the right charts to see that inflation is here and it’s already causing crazy things to happen, like having to show up with cash on the first day of a house listing or having to pay $4500 for a twenty-year-old Honda CBR 600. 

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s