Think differently about inflation to recognize opportunities

Credit to Lyn Alden on Twitter for the idea for this chart. As she quipped when she posted a similar chart, inflation is low... as long as you don't buy food, or a house, or commodities .

CPI inflation has been unusually low for the last decade

From 2010 to 2019, CPI (the Consumer Price Index, a popular measure of inflation ) averaged 1.73%. That's a historically low inflation rate. Since 1913, CPI inflation has averaged about 3.1% per year. The Federal Reserve's target inflation rate is about 2% per year. The last decade's low CPI inflation rate puzzled economists and gave rise to a new economic theory called "Modern Monetary Theory," which argued that the US government needed to increase its deficit spending in order to hit its 2% inflation target. According to MMT , the limit on government spending is inflation , not revenue.

In times of crisis, CPI inflation can get much higher

During certain historical periods-- usually periods of crisis, such as wartime-- CPI inflation got much higher. In the WWI / Spanish Flu decade it averaged nearly 10%, and in the WWII decade it averaged nearly 5%. In the Vietnam War decade the average exceeded 7%. High inflation during times of national crisis seems to result from "loose" monetary policy and enormous deficit spending. When inflation gets this high, the Central Bank typically has to "tighten" monetary policy in order to control it. That means raising taxes, raising interest rates, and reducing deficit spending. "Tight" monetary policy can cause prolonged recessions. It took over a decade of high interest rates to get Vietnam War-era inflation under control.

Could the massive deficit spending and loose monetary policy of the Covid-19 crisis usher in a new era of high CPI? Presently, economists don't expect it. The Federal Reserve forecasts about 2.5% inflation this year, to fall to 2% in 2022. But the Fed also doesn't have good models of inflation , so to some extent these projections are a shot in the dark.

Is CPI a broken measure?

CPI includes several components, including food, energy, apparel, and rent. Several factors have conspired to keep CPI low. Thanks to technological changes such as automation and renewables, apparel and energy costs have trended downward over the last couple decades. And rents are kept artificially low in many areas of the country by rent controls that limit how much landlords can increase rent. Purchase prices for single-family homes are not included in CPI , and purchase prices have grown much faster than rents:

Obviously CPI also doesn't include stocks, bonds, and other investment assets, which have inflated to pretty astronomical levels. It also doesn't include the cost of healthcare, which grew about 3.7% per year over the last decade and are projected to grow nearly 5% per year over the next decade. So there's a case to be made that "real" inflation in the economy may actually be higher than the CPI numbers suggest.

Ben Bernanke once said that "inflation is always a monetary phenomenon." If so, then CPI isn't a very good measure of inflation , because CPI is influenced by all sorts of non-monetary phenomena like supply and demand shocks, technological changes, price manipulation, and government regulations. CPI is a crude approximation at best, and at worst a broken metric.

What if there's not just one inflation rate?

The reality is that different categories of prices "inflate" at different rates. For instance, large increases in the money supply often cause inflation in asset prices, but not in consumer prices. It's partly a function of how the newly created money is distributed. If it goes into the pockets of the wealthy, they will use it to speculate on stocks and real estate. You will see asset price inflation , but not consumer price inflation . But if you put it into the pockets of regular people, then you may see consumer prices start to rise. And even within the broad categories of "consumer goods" and "assets," there are loads of subcategories. During a pandemic, socially distanced assets (like suburban housing and food at home) will be in high demand, while non-socially distanced assets (like urban housing or commercial real estate or restaurant food) will not. Thus, urban home prices might deflate even as suburban home prices inflate.

Once you start to see inflation as lots of different numbers rather than as a single number, you will start to recognize new investment opportunities. You want to own asset categories where inflation will run hotter than CPI , not asset categories where it will run cooler than CPI . It's extremely valuable to understand the forces that influence some categories to inflate faster than others, and to be able to recognize turning points where a category's inflation rate will change. That's how fortunes are made.
Comment: Since it's been discussed in the comments, I need to address the issue of adjustments. In CPI indexes, economists make "hedonic adjustments" when the characteristics of a product change. For instance, a car may cost more today than it did five years ago, but it also has millions more computer chips in it. Did the price increase because of inflation, or because it's now a better product? Economists try to adjust for product changes.

Big Macs haven't changed much, so they don't need to be hedonically adjusted. The Case-Shiller home price index is similar. It doesn't need to be hedonically adjusted because it looks at repeat sales of homes that haven't undergone major renovations or deterioration.

So in theory, the Big Mac index and Case-Shiller home price index should be comparable to CPI if economists are doing their adjustments right. But that's a big "if," and the reality is that it is not an apples-to-apples comparison between the Big Mac index and CPI. There are other ways that CPI data get massaged besides just hedonic adjustment. Decisions are made about what to include and what to exclude, and data are often "trimmed" to exclude the categories of goods whose prices have changed the fastest.

Here's more of an apples-to-apples comparison between two food and recreation consumer price indexes that use the same methodology. Unfortunately the scales on this chart are a little wonky, and TradingView won't let me change them. The platform seems to struggle a bit with these percentage-wise comparisons. But the long and short of it is that food is up about 27% since 2009 while recreation is up about 8% since 2009 according to these particular indexes.

Check out my free market news and education podcast, Wall Street Petting Zoo, on YouTube or your favorite podcast app! On Podbean at and on Twitter at


Interesting! We've featured this in Editors' Picks. Inflation is not an easy to understand topic.
200 coins
+9 Reply
pfortz TradingView
@TradingView, Lyn Alden's figure was even more detailed -- I wish this author had linked to it.
+4 Reply
@pfortz, yes, I should have included a link for the sake of giving proper credit. I only opted not to because she included a lot of additional variables that I didn't find all that relevant. Thanks for linking her chart.
+3 Reply
watchtrend ChristopherCarrollSmith
@ChristopherCarrollSmith, Thanks for your idea - the same as we think differently about bitcoin. and as the most dont expect or forgot BCD, is there a huge trend coming with NFT, hoplly if you time takes a look at it. thank you
@watchtrend, FWIW, I think ETH is taking the lead from Bitcoin now that it's going proof-of-stake.
mattchimoku ChristopherCarrollSmith
@ChristopherCarrollSmith, how are people still forgetting that ethereum is a trying to solve decentralised app platform & bitcoin is solving store of value problem.
Ethereum does not have any sound monetary properties to be a form of sound money.. that doesnt mean it doesnt have value just not as a sound money. you are comparing something like apple ios to gold. to very different things mate! The fact eth rolled back in the DAO hack, broke the rules of the protocol, broke decentralisation - have people forgetton about this or many haven't done there research!
+2 Reply
mattchimoku mattchimoku
@mattchimoku, cheers for the charts! be good to see how inflation in resources / commodities fits into this.. quarterly's showing solid numbers!
@mattchimoku, just expressing a view about how prices will move, not about which is the better technology. I'm really more of a no-coiner than a fan of any particular coin.
Also, they are pushing the cart before the horse: the CPI has the consumer goods part (groceries) that is constantly being conveniently changed so it keeps inflation low. For instance: When they started it had raw beef in it, beef prices has skyrocketed. So what do they do? They just change the beef to ground beef which, over time, has been consisting of less and less meat, and thus stays at an even (low)price. And Voila, almost no inflation.

(edit) - They explain the change of goods by looking at the data. "no one buys beef anymore, we need a better metric" conveniently ignoring the fact that beef is too expensive for most people.
+9 Reply
@Stillon, yeah, I agree. There are a million manipulations: hedonic adjustments, trimming, decisions about what to include. It's broken partly because of changes in the market and partly because a broken metric is useful to policymakers.
+3 Reply
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