Inflation is currently a priority for many consumers, businesses and investors. In response to a recent Bank of America survey, asset managers around the world agreed that inflation was the number one market risk, replacing COVID-19 for the first time since February 2020.
Another survey this month found that more than three-quarters of Americans were “very” or “somewhat” concerned about inflation. Perhaps not surprisingly, young Americans who have yet to peak their incomes were the most worried.
There are many signs that inflation is already there: commodity prices are on the rise. Home prices are on the rise. Energy prices are on the rise. Shipping rates are way up. Used cars and trucks are through the roof.
And the trend will only accelerate as social distancing loosens and the economy gradually returns to “normal.” Last week, the Ministry of Labor reported that initial jobless claims fell to their lowest level in a year. People are starting to travel again. On Sunday, March 21, more than 1.5 million people boarded commercial flights, the highest number since the lockdowns began.
Thanks to “stimulmy” checks and unprecedented money printing, real disposable income is expected to experience its largest increase on record in any given six-quarter period, says Credit Suisse. The firm expects US consumption to increase by 10% this year, which will lead to a significant rise in new orders and hires, all of which are highly inflationary. This month, in fact, US manufacturers reported the biggest increase in new orders since 2014, according to IHS Markit.
The pandemic may have made the IPC obsolete
My question is whether we are measuring inflation accurately. What if we do everything wrong? As investors we want to make decisions based on the best data available, so what should we do if the data is incomplete or wrong?
Here in the United States, inflation is measured by the Consumer Price Index (CPI), which is updated monthly by the Bureau of Labor Statistics (BLS). The standard way BLS researchers do this is to literally visit stores and ask them for prices.
This approach may seem intuitive, but a recent Bloomberg article lists two fundamental issues.
First, the CPI is based on a basket of goods and services that Americans may have spent money on in the past, but whose sales have suffered during the pandemic. Think about entertainment and recreation, restaurants and hotels, new clothes and more.
And second, with thousands of stores and businesses closed in the past year, researchers were unable to make in-person visits, leaving gaping holes in the data. Many purchases moved online in 2020 – up to $ 105 billion, according to one estimate – where month-to-month price volatility can be much greater and faster.
As the economist of the International Monetary Fund (IMF), Marshall Reinsdorf, recently put it: “Spending habits have changed abruptly and the weight of the CPI suddenly became obsolete(Emphasis added).
Therefore, there can be a huge amount of inflation that just goes undetected.
The BLS is reportedly considering adjusting its methodology to account for changing spending habits and preferences – which is one way of admitting that the data it produces is biased.
But in the meantime, what do we do as investors? One source I have turned to time and time again is Shadow Government Statistics, or ShadowStats, which provides alternative inflation data based on pre-1980 and pre-1990 methodologies. Using these methodologies, prices at the consumption increase by 9% or more rapidly, not by 1.7%.
Interestingly, a Harvard economist, Alberto Cavallo, built his own index of goods and services Americans actually purchased during the pandemic, based on credit card transaction data. What this index shows is that inflation has been slightly higher than the CPI. In February, it actually exceeded the Federal Reserve’s 2% target inflation rate.
Time to gain exposure to real assets?
Since prices are rising faster than reported, investors would be smart, I think, to get exposure to assets that are currently experiencing the highest inflation and are in a position to rise even more as they go. as the economy grows. This means real assets – metals and minerals, lumber, cement, energy and other commodities and raw materials. As I wrote in February, we may be on the cusp of a new commodities supercycle, and it’s not too late to start participating in it.
This is especially the case now that President Joe Biden has signaled that his next legislative project will be infrastructure. This week we’re supposed to get more details on his $ 3 trillion spending program, but from what I’ve seen, $ 1 trillion will be spent on improving roads, bridges, lines. railways, ports, power grids and more.
There is a lot of work to be done, after all. The American Society of Civil Engineers (ASCE) recently assigned US infrastructure a C- and estimated the investment gap at $ 2.6 trillion.
Treasury Secretary Janet Yellen told the House last week that taxes will likely need to be raised to pay for an operation of this magnitude. All the more reason to turn to raw materials and the companies that produce them.
For complete information on this position Click here.