The inflation rate is one of the most confused and misunderstood topics. Most economists have absolutely no idea how inflation really impacts people, and typically oversimplify it in their overzealous attempt to make economics a question of simple math formulas.
Here’s the lowdown on inflation: the real inflation rate is about 4-500% higher than what’s being reported. Food and energy prices (a huge hunk of most peoples’ weekly budgets) have exploded 30-70%. The only stuff that’s getting cheaper is the unnecessary things like TV and other goods that are on sale by desperate business owners. The cheap stuff isn’t important, and the important stuff isn’t cheap — this means the inflation rate looks low while it’s actually insanely high.
The Official Inflation Rate
The official inflation rate is essentially a monthly calculation of how much the Consumer Price Index (CPI) has changed. The CPI is a collection of average prices for certain consumer goods, with some prices weighed in more than others.
Some people, including most economists, mistakenly think that an increase in the CPI is essentially the same thing as increased inflation. This leads the federal government to act upon an inflation rate in a manner that is hurting people who are experiencing much higher inflation rates than the government believes exists.
In short, an increase in the CPI isn’t the same as an increase in the inflation rate. Here are a few problems with using the CPI as the only foundation for understanding the inflation rate.
- Inflation is Situational. This is going to sound obvious, because it is. If you run a company that makes stuff out of copper, and copper prices are up 75%, then your inflation rate isn’t going to be the overal CPI’s slight increase. It’s going to be way, way higher. If you’re a trucker, and the price of deisel goes up 20%, it’s way higher than the CPI rate.
In the end, there is no exact inflation rate that’s the same for everyone in the nation. Inflation isn’t static. It’s not like a pool slowly being filled with water, but more like an ocean filled with title waves and tsunamis… the water level depends on where you’re at and where you’re going.
- Different Markets are … Different. In kind of the same way as above, every market has different inflation rates. For example, prices might explode higher in an area with a Fed induced real estate boom than a region that’s still mostly unaffected. Prices in California and Arkansas probably aren’t even close to the same. This isn’t as big of a point as the one about inflation above, but it’s still something to consider.
- Not All Prices are Equal. This is a big deal. The way they calculate the CPI right now just isn’t right. Most people who make 50-100k right now are getting hit with much higher food costs, electric costs, oil/fuel costs, and within a year or so higher natural gas prices. They’re getting about 80% of what they used to get out of every dollar in their budget… but the official inflation rate is under 2%. That’s just not realistic. Sure, TVs might be cheaper, but people don’t buy a new TV every week — they do buy food and fuel every week. The pricing is messed up.
The Real Inflation Rate
So what’s the real inflation rate? I’ve written extensively about inflation over at the inflation 101 course at Stand Strong Research. All together, if you look at the way prices are actually increasing, and looked at the math the way the government used to report the inflation rate (learn more about that at Shadow Stats), then we’ll see inflation somewhere in the 5% range, with peaks at 10% in the last year or so. That’s about 500% higher than the government is reporting right now.
So why is the government mis-reporting the current inflation rate? Because the higher the inflation rate, the worse politicians look, and more likely they’ll all get fired. It’s an accounting game, and they’re winning. It’s sad, but it’s true.
So that’s our brief introduction to the inflation rate. Make sure to subscribe to get my free book on investing in gold — it has investment recommendations and an actionable plan that you can follow to put gold in your portfolio within minutes of reading it. Don’t forget to also check out our silver coins page.