Raub Report: August 2014

August 20, 2014

Pop Quiz: What does “CPI” stand for?  Answer: “Consumer Price Index.”  What does this mean?  It is designed to measure the change in prices of products that you and I buy every week; that is, it is a measure of “the cost of maintaining a constant standard of living, as determined by prices paid by urban consumers for a representative basket of goods and services” (Bureau of Labor Statistics).  Why is it important?  It is generally used as the indicator of the rate of inflation.  It is the index used to make Cost of Living adjustments for many important things, like Social Security benefits, wage increases, and retirement planning.  What is CPI in San Antonio?  In 2012 the rate was 1.6% and in 2013 it was 2.12%.

Now, it gets interesting.  How many times has the government, the creator and keeper of this data (the Bureau of Labor Statistics to be exact) changed the way it is calculated? Several!  Unfortunately, CPI was calculated one way prior to 1980, then it was changed and then changed again in 1990.  The reason for the changes are supposedly academic accuracy, but when politics and money get involved, all sorts of mischievous distortions creep in.  So, the inflation figures you see talked about in the news may not be as useful as you hoped.

Why would the government do this?  For one thing, keeping the CPI low, saves the government in Social Security and other payments. In the private sector, CPI was often used to calculate rent increases in leases so that they would keep up with inflation and not cause the landlord to lose out to a weaker dollar. So, artificially suppressing the rate of inflation serves a number of purposes, like 1. It saves the government millions of dollars in cost of living increases.  2. It hides the ill effects of government policies; 3. Wage adjustments lose ground to inflation. 4. If the Fed uses CPI to decide when to raise interest rates, delaying saves billions in interest on government bonds financing our deficit of $17-trillion.  The website Shadow Government Statistics says “CPI no longer measures full inflation for out-of-pocket expenditures … Understated inflation used in estimating inflation-adjusted growth has created the illusion of recovery in reported Gross Domestic Product.”

Would you be interested to know what the CPI number is based on the old definitions?  Using the current definition the rate of inflation is about 2% annually; using the 1980 definition it is about 6% annually; but using the definition prior to 1980’s it is about 10%.  Remember the late 1970’s? Inflation approached 15% for a brief period; long gas lines, economic recession, Jimmy Carter was the President and said we were in a “malaise,” a crisis of confidence.   If Americans thought inflation was now running at 10%, I wonder if we would have another crisis of confidence.

Commercial real estate investments are still one of the best inflation hedges.