Tuesday, July 22, 2014

Inflation where it matters: Close to 50 percent of Americans indicate spending more on groceries and fuel this summer. Nearly one third indicate more spending on rent and mortgage payments.

July 22, 2014

The stock market continues to move upwards ambivalent to economic indicators and the reality that inflation is permeating throughout our economy. The Fed continues to point at CPI as evidence that inflation remains subdued and this gives them the motivation to move forward with monetary policies that we have never embarked upon. We are already getting a taste of the bigger consequences including a growing low wage labor force. A recent Gallup survey found that Americans are spending more money on items that actually matter and items that consume a large portion of a household’s budget. This is key here in understanding the nature of inflation. Items like housing, healthcare, food, and energy make up a large portion of spending. Yet the Fed looks at other items that consume a small part of a household’s budget and balance out the overall picture. What you get is a massive understating of inflation and a stock market heavily juiced on easy money.Large pools of money are chasing real assets and crowding out regular Americans from the market.
Where inflation matters
It is interesting to see how people react to a constant feed of distorted information. The message is clear and it is one that is underplaying inflation. The tone set by the Fed is one in which monetary easing should continue to go on because inflation is simply not happening in the real economy. This could not be further from the truth.
Looking at the Gallup survey, you can find that Americans are spending more on the items that already consume a large part of their budgets:
Source: Gallup, GS
The data?
-Half of Americans indicate they are spending more this year on groceries
-Over 40 percent indicate they are spending more on gas/fuel
-Over 35 percent indicate more is being spent on utilities
-Roughly 35 percent indicate more spending on healthcare
-Nearly 30 percent indicate spending more on rent/mortgage payments
Does this seem like a market where inflation is actually muted? The Fed continues to mention what little inflation is out there is merely background noise like a cricket in the night. The above survey completely shatters that reality. Americans are spending more on items that actually matter and consume a large portion of their household income. Take a look at this data:
You will find that inflation is very much a real thing if we go back to 2000. A gallon of gas is up 176 percent since 2000. Ground beef is up 96 percent. Your typical college tuition is up 68 percent. A new car will now cost you 55 percent more than it would have in 2000. Your average home is now up 50 percent even though we went through the biggest housing bubble our nation has faced (largely driven by cheap and dangerous banking policy). Yet the overall CPI is only registering a 39 percent increase. The Fed looks at the PCE Deflator and this is only up 31 percent. So it is no surprise why the Fed has aggressively ramped up monetary policy.
Yet many people feel that as long as they can service their debt, all is well. They continue to listen to the mainstream press that rarely discusses incomes or inflation. So in the end, this information is largely left unexamined and many walk through life as financial zombies. Yet people are feeling the pinch and this is because monetizing debt and bailing out banks does have real world consequences. The end result is higher prices for those actually working in the real economy versus speculating in the financial sector. Since low wage jobs are becoming the norm, things are simply going to feel more expensive because they are. Inflation is hitting where it matters.

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