How well do you know inflation? Why it matters for your wealth.
One of the greatest lies about our economies to my mind is that inflation is currently low (<2%) in most advanced economies.
When people think of inflation, they think of the government's consumer price index (CPI) measure. In essence, this measures how much the cost of a representative basket of goods changes over time. Sounds fair, right? Even assuming the official measures properly reflect the change in the price of the basket, I'd argue this measure does not measure inflation.
The giveaway is in the name, the consumer price index, i.e. it measures 'consumables'. There is more to life than consumables! While these indexes may purport to account for housing prices, the reality is they do not. As an Australian, I've watched house prices increase year after year at over 10% per annum while official inflation remains at 2% or under.
As a younger person, my wealth has been eroded as house prices move further and further away from me. Surely that is the true definition of inflation, the very same house costs more than it did a year ago.
Take a long enough time series on property or equities and you'll see that true inflation is nothing like what you may think. The inflation in asset prices as a result of central bank policies (zero interest rates and quantitative easing) after the GFC has impoverished many of the so called 'middle class'. The problem is compounded by the pathetic returns to saving (interest).
As Austrian economists say: 'inflation, always and everywhere, is primarily caused by an increase in the supply of money and credit'.
How best to protect and grow your wealth?
Understand how the system works. Understand if inflation is say 7% a year, having your money in the bank earning nothing or 1 or 2% is financial suicide in the long term.
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The Engima.
I see what you're getting at, but we're in a bit of a semantic argument. I think you're mistaking the cost of living with inflation.
If the cost of living increases in an area, it may not be the result of inflation, but another economic factor (like if a bunch of rich people move into your area, fancy stores follow them and landlords pump up your rent to get wealthier tenants).
Unfortunately the outlook for keeping pace with cost of living increases can be bleak. Most banks offer less than 1% interest, and trying to make money in the market without taking the time to learn about it first can be suicidal for your finances.
As tech improved, people can telecommute more, so I'm interested to see how this effects housing costs across the world.
It might be semantic, I'm not making any mistakes about cost of living v official inflation. I'm asking the question is official inflation an honest measure? You're adopting its definition as 'truth' which is where you have misunderstood.
My dear sir or madam,
You seem to fundamentally misunderstand what inflation is. Inflation is the difference between "monetary growth," i.e. how much money is printed, and "real growth," i.e. how many new goods and services are produced. The consumer price index is an average of most consumed goods. Although I agree that the CPI is a bit misleading, you must understand the difference between "inflation" and "appreciation." The former previously defined and the latter the difference between the increase in price of a commodity and the average level of price increase. Basing an inflation rate on one commodity is astoundingly more intellectually dishonest than the CPI. Do you also not think that QE and increased lending are included as part of the monetary growth statistic? How inept do you think the Fed is? I agree that they should not exist and that they have bungled things before (like reducing the monetary supply by a third in 1930), but do you think that the Fed is so dishonest or inept to not do that much?
You seem to be referring to the GDP deflator which is a common alternative to the CPI. I was never suggesting basing it on one commodity, I was making the point asset prices (which affect your quality of live and purchasing power) are effectively ignored.