Random thoughts and plans for the coming inflation.

[Simpleton]

I have a working theory that inflation will be here in the 5-10% level for the coming decade.

Governments simply cannot afford to raise interest rates with their current debt levels, so interest rates will NEED to stay low. The act of ensuring they do not raise is inflationary and also has the benefit of reducing debt in the process. Many people claim central banks will have to raise rates to combat inflation - I simply don't believe that is the plan. This will be a big decade long financial reset.

Im not sure if you buy into my theory, but so far I do not think anything I have said is anything you havn't heard before, but what I am interested in is what I can do to plan for it. In my case, for Canadians.

Personally I have been thinking a lot about taking out a huge mortgage on a large, expensive primary residence. The capital gains would be made tax-exempt, and the debt reduced through inflation in the coming decade.

I have also been thinking about how the US has been moving up the capital gains taxes and how Canada will almost surely enact an even higher capital gains inclusion rate in the next budget - this is one of the advantages of inflation for governments - they can get the tax even if the real value doesnt go up. This is making me think a lot more about the advantages of dividend payors in my taxable accounts vs growth (a paradigm shift from convensional wisdom). I am also looking at investments in consumer staples and materials specifically.

Finally I have been thinking about pulling forward consumption with my cash. I will need a car in the next few years, its likely cheaper now than going forward, especially financed. Ditto for furniture.

If you have a similar view of what will happen with inflation in the coming decade, what are you doing to prepare for it?

[MustacheAndaHalf]

"The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With inflation running persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer‑term inflation expectations remain well anchored at 2 percent."
https://www.federalreserve.gov/newsevents/pressreleases/monetary20210127a.htm


Meaning the Fed's goal is very explicitly to increase inflation, not lower it.  Inflation has been too low, and needs to average over 2% to balance out.

But that's not the Fed's only goal - they aim for maximum possible employment.  Right now unemployment is still much higher than before Covid-19 began, so they are likely to keep interest rates low and QE going while a jobs recovery continues.

[vand]

I'm in agreement

- Inflation will be allowed to rise without actually acknowledging this is official policy. They know that they need inflation to inflate away the debt
- Interest rates will be supressed as they know they cannot afford to repay rollover debt at anything approaching real interest rates

Effectively financial repression:
https://moneyweek.com/investments/investment-strategy/603110/peter-spiller-how-to-not-lose-money-to-inflation-and

[YttriumNitrate]

Meaning the Fed's goal is very explicitly to increase inflation, not lower it.  Inflation has been too low, and needs to average over 2% to balance out.

CPI inflation was 2.1%, 2.1%, 1.9%, 2.3%, and 1.4% in 2016, 2017, 2018, 2019, and 2020, respectively [source]. To average thing things out, it's not going to take a huge increase to get back on track to 2.0%.

Edit: My preparations for inflation include: Owning relatively few bonds, and having two 30-year mortgages that are being paid off as slowly as possible.

[RWD]

I have a working theory that inflation will be here in the 5-10% level for the coming decade.

That is a huge range: 63% - 159% after compounding for a decade.

[ChpBstrd]

Any prediction of 5-10% inflation needs to factor in why/how the Fed will sit on at least $8T in assets and not sell any of them to reduce the velocity of money. When I read the Fed's statement, I hear words to the effect of "we'll let inflation hit 3-4% for a whole year before we use QT or raise rates, because we've been burned by raising rates based on erroneous forecasts of inflation for the past 25 years." The prediction also needs to address what happens when the Fed stops buying $120B in assets per month. Arguably this massive QE is currently the only thing keeping the CPI above 1.5%. We're afraid the patient is going to run out of the ICU when the patient is still on life support.

https://fred.stlouisfed.org/series/WALCL

The Fed's own estimate of CPI in 2021 is 1.9%. Fed estimates have typically been missed for many years now; they're usually on the high side which is how they keep raising rates prematurely, as in 2016.

https://www.minneapolisfed.org/about-us/monetary-policy/inflation-calculator/consumer-price-index-1913-

I could be wrong. Inflation could go up 2.5% in 2021, another 3.5% in 2022, 4.5% in 2023... and for whatever reason during all this time Jerome Powell and company decide NOT to stop buying billions in assets per day, decide NOT to sell any of the Fed's assets, and decide NOT to raise interest rates. Then inflation goes to 6%+ in 2024, etc... That's the narrative, and it absolutely requires the Fed to sit idly by - for years - with QE and ZIRP policies while it happens.

I don't see that scenario as likely. The Fed is now more powerful than it has ever been in American history, because they have an $8T war chest of assets that can be sold to yank money out of the economy, comprising a full 40% of M3 that can be utterly erased with the click of some buttons. Plus they are at an interest rate starting point near zero. Powell and Co. have a license to kill inflation and the weapons to do it - not a doubt in my mind.

IMO, we should be more worried about bubbles and a deflationary recession than inflation.

That said, if 5-10% inflation did come to pass, I would not want to be leveraged on real estate. In the 1970's, house prices were essentially the cost of construction, which was tied directly to inflation, making housing a great inflation hedge. Today house prices are driven by the low cost to finance them for 30 years, particularly in HCOL areas where a house that costs $200k to build is worth over $1M, or in MCOL areas, where it costs $400k. If mortgage rates go from 3% to 6%, the cost of financing each $100k for 30y goes from $421.60 to $599.55 per month, a 42% drop in affordability. When all houses across the market become 42% less affordable, you can guess what will happen to prices. Only a portion of this loss is justified by the higher cost of construction if most of one's home value is not related to the cost of construction, and rising construction costs are accompanied by rising insurance costs too.

Think of it this way. If stocks were booming due to cheap margin, would you make a long-term commitment to stocks if you felt that margin rates were about to go up?

[bacchi]

That said, if 5-10% inflation did come to pass, I would not want to be leveraged on real estate. In the 1970's, house prices were essentially the cost of construction, which was tied directly to inflation, making housing a great inflation hedge. Today house prices are driven by the low cost to finance them for 30 years, particularly in HCOL areas where a house that costs $200k to build is worth over $1M, or in MCOL areas, where it costs $400k. If mortgage rates go from 3% to 6%, the cost of financing each $100k for 30y goes from $421.60 to $599.55 per month, a 42% drop in affordability. When all houses across the market become 42% less affordable, you can guess what will happen to prices. Only a portion of this loss is justified by the higher cost of construction if most of one's home value is not related to the cost of construction, and rising construction costs are accompanied by rising insurance costs too.

There are a few scenarios here.

1) You're not moving. Inflation, through higher wages and higher stocks, eats away at your fixed rate debt. +++
2) You have enough equity and plan to downgrade. You sell your lower-priced house but are able to buy a smaller, lower-priced,  house, with cash. +-
3) You have enough equity and want to make a lateral move. You sell your lower-priced house but buy a similar, lower-priced, house with equity and another mortgage. The mortgage is at a high rate, which is (for now) somewhat covered by higher wages and higher stock prices. -
4) You don't have enough equity, prices decline, and you want to move or can't make the payments. You're hosed because you owe more than the house is worth. ---

[Tucandream]

I've read talk about the capital gain exclusion for principal residence's being abolished. Just talk at this point but worth considering what would happen then.

[Simpleton]

Any prediction of 5-10% inflation needs to factor in why/how the Fed will sit on at least $8T in assets and not sell any of them to reduce the velocity of money. When I read the Fed's statement, I hear words to the effect of "we'll let inflation hit 3-4% for a whole year before we use QT or raise rates, because we've been burned by raising rates based on erroneous forecasts of inflation for the past 25 years." The prediction also needs to address what happens when the Fed stops buying $120B in assets per month. Arguably this massive QE is currently the only thing keeping the CPI above 1.5%. We're afraid the patient is going to run out of the ICU when the patient is still on life support.

https://fred.stlouisfed.org/series/WALCL

The Fed's own estimate of CPI in 2021 is 1.9%. Fed estimates have typically been missed for many years now; they're usually on the high side which is how they keep raising rates prematurely, as in 2016.

https://www.minneapolisfed.org/about-us/monetary-policy/inflation-calculator/consumer-price-index-1913-

I could be wrong. Inflation could go up 2.5% in 2021, another 3.5% in 2022, 4.5% in 2023... and for whatever reason during all this time Jerome Powell and company decide NOT to stop buying billions in assets per day, decide NOT to sell any of the Fed's assets, and decide NOT to raise interest rates. Then inflation goes to 6%+ in 2024, etc... That's the narrative, and it absolutely requires the Fed to sit idly by - for years - with QE and ZIRP policies while it happens.

I don't see that scenario as likely. The Fed is now more powerful than it has ever been in American history, because they have an $8T war chest of assets that can be sold to yank money out of the economy, comprising a full 40% of M3 that can be utterly erased with the click of some buttons. Plus they are at an interest rate starting point near zero. Powell and Co. have a license to kill inflation and the weapons to do it - not a doubt in my mind.

IMO, we should be more worried about bubbles and a deflationary recession than inflation.

That said, if 5-10% inflation did come to pass, I would not want to be leveraged on real estate. In the 1970's, house prices were essentially the cost of construction, which was tied directly to inflation, making housing a great inflation hedge. Today house prices are driven by the low cost to finance them for 30 years, particularly in HCOL areas where a house that costs $200k to build is worth over $1M, or in MCOL areas, where it costs $400k. If mortgage rates go from 3% to 6%, the cost of financing each $100k for 30y goes from $421.60 to $599.55 per month, a 42% drop in affordability. When all houses across the market become 42% less affordable, you can guess what will happen to prices. Only a portion of this loss is justified by the higher cost of construction if most of one's home value is not related to the cost of construction, and rising construction costs are accompanied by rising insurance costs too.

Think of it this way. If stocks were booming due to cheap margin, would you make a long-term commitment to stocks if you felt that margin rates were about to go up?

So I think a lot of what you say makes sense on a historical basis, but I do not think that the governmet/fed/central banks are thinking of this in the same way as they have historically.

I firmly believe that the role of the central bank has been expanded and no longer has much to do with preserving stability of the currency. Now they are looking for full "inclusive" employment. The fed in the states (As well as the bank of Canada) are now more a tool of the federal governments.

All the talk of raising rates I think is a non starter. Rates simply cannot rise. Whatever manipulation needs to happen to prevent rates from rising, will absolutely happen. That is my prediction. We may even see negative rates. It is the only way the entire west can avoid defaulting.

When I say I think inflation is coming, I do not necessarily believe it will be acknowledged; but I DO believe purchasing power will be drastically reduced even if "CPI" is reported as a low number.

[PJC74]

inflation is here: just pumped gas at $3 gallon, electrician charged us 10% more for the same job he did last winter, plywood is $80 a sheet and our grocery bill is up 8% so far this year compared to last year.

[ChpBstrd]

Any prediction of 5-10% inflation needs to factor in why/how the Fed will sit on at least $8T in assets and not sell any of them to reduce the velocity of money. When I read the Fed's statement, I hear words to the effect of "we'll let inflation hit 3-4% for a whole year before we use QT or raise rates, because we've been burned by raising rates based on erroneous forecasts of inflation for the past 25 years." The prediction also needs to address what happens when the Fed stops buying $120B in assets per month. Arguably this massive QE is currently the only thing keeping the CPI above 1.5%. We're afraid the patient is going to run out of the ICU when the patient is still on life support.

https://fred.stlouisfed.org/series/WALCL

The Fed's own estimate of CPI in 2021 is 1.9%. Fed estimates have typically been missed for many years now; they're usually on the high side which is how they keep raising rates prematurely, as in 2016.

https://www.minneapolisfed.org/about-us/monetary-policy/inflation-calculator/consumer-price-index-1913-

I could be wrong. Inflation could go up 2.5% in 2021, another 3.5% in 2022, 4.5% in 2023... and for whatever reason during all this time Jerome Powell and company decide NOT to stop buying billions in assets per day, decide NOT to sell any of the Fed's assets, and decide NOT to raise interest rates. Then inflation goes to 6%+ in 2024, etc... That's the narrative, and it absolutely requires the Fed to sit idly by - for years - with QE and ZIRP policies while it happens.

I don't see that scenario as likely. The Fed is now more powerful than it has ever been in American history, because they have an $8T war chest of assets that can be sold to yank money out of the economy, comprising a full 40% of M3 that can be utterly erased with the click of some buttons. Plus they are at an interest rate starting point near zero. Powell and Co. have a license to kill inflation and the weapons to do it - not a doubt in my mind.

IMO, we should be more worried about bubbles and a deflationary recession than inflation.

That said, if 5-10% inflation did come to pass, I would not want to be leveraged on real estate. In the 1970's, house prices were essentially the cost of construction, which was tied directly to inflation, making housing a great inflation hedge. Today house prices are driven by the low cost to finance them for 30 years, particularly in HCOL areas where a house that costs $200k to build is worth over $1M, or in MCOL areas, where it costs $400k. If mortgage rates go from 3% to 6%, the cost of financing each $100k for 30y goes from $421.60 to $599.55 per month, a 42% drop in affordability. When all houses across the market become 42% less affordable, you can guess what will happen to prices. Only a portion of this loss is justified by the higher cost of construction if most of one's home value is not related to the cost of construction, and rising construction costs are accompanied by rising insurance costs too.

Think of it this way. If stocks were booming due to cheap margin, would you make a long-term commitment to stocks if you felt that margin rates were about to go up?

So I think a lot of what you say makes sense on a historical basis, but I do not think that the governmet/fed/central banks are thinking of this in the same way as they have historically.

I firmly believe that the role of the central bank has been expanded and no longer has much to do with preserving stability of the currency. Now they are looking for full "inclusive" employment. The fed in the states (As well as the bank of Canada) are now more a tool of the federal governments.

All the talk of raising rates I think is a non starter. Rates simply cannot rise. Whatever manipulation needs to happen to prevent rates from rising, will absolutely happen. That is my prediction. We may even see negative rates. It is the only way the entire west can avoid defaulting.

When I say I think inflation is coming, I do not necessarily believe it will be acknowledged; but I DO believe purchasing power will be drastically reduced even if "CPI" is reported as a low number.

The U.S. Fed's two-part mandate to maximize employment and optimize inflation is itself a compromise between Democrats (who want full employment) and Republicans (who have an interest in low inflation). So far, I think the Fed gets an "A" for maximizing both functions simultaneously, regardless of whichever party is in control. Prior to the pandemic, unemployment was only 4% and inflation was <2%. Post-pandemic, unemployment is only 6% and inflation still <2%. By early 2022, we'll be back in the 4% range, which is remarkable considering how many people are always switching jobs, having health issues, between jobs, etc. I'd say 4-5% unemployment is "full employment". Compared to many other countries, the U.S. has a firm grip on its economy.

You are correct that rates simply cannot rise. A bond/mortgage/real estate financial crisis would ensue if rates rose just 2%, which would cause unemployment. Convexity becomes huge at lot interest rates. Additionally, a lot of businesses would shut down activities that are generating 5% returns and only made sense when financed with debt at 4%. This is the one-way street to Japanification we've been on for many years. The Fed hopes we can avoid a lost decade or two if they can maintain inflation at 2-3%, the optimum for economic growth.

The catch would be if interest rates rose in competing currencies. As hard as it is to imagine, rising rates in the yen, euro, pound, yuan, etc. would cause relative devaluation of the dollar. This would be great for US exporters, but it would show up in CPI/PPI. Would the Fed hold off on policy changes if inflation was being driven by imports (i.e. other countries' inflation)?

You are also correct that purchasing power is being reduced, but it's not for things like consumer staples, consumer durables, food, or energy that count toward CPI. Low interest rates are fueling higher and higher valuations for investable assets. That means we'll have to pay more for housing and have to save more for retirement. When we have to spend more on such things, our purchasing power is reduced even in a low-inflation economy. The solutions are to lock in low housing costs (at low interest rate risk) by buying in a LCOL area, to set very ambitious savings targets, and don't try to retire until one hits a 3.5% or 3.75% WR. The net effect on the FIRE crowd is similar to what inflation would do, but it's not inflation. 

[Simpleton]

inflation is here: just pumped gas at $3 gallon, electrician charged us 10% more for the same job he did last winter, plywood is $80 a sheet and our grocery bill is up 8% so far this year compared to last year.

Exactly this.

People typically have Housing, Cars and Groceries as their 3 biggest expenses - all of which are up significantly. Through the magic of dishonest statistics though, inflation is zero bound though.

[Simpleton]

Any prediction of 5-10% inflation needs to factor in why/how the Fed will sit on at least $8T in assets and not sell any of them to reduce the velocity of money. When I read the Fed's statement, I hear words to the effect of "we'll let inflation hit 3-4% for a whole year before we use QT or raise rates, because we've been burned by raising rates based on erroneous forecasts of inflation for the past 25 years." The prediction also needs to address what happens when the Fed stops buying $120B in assets per month. Arguably this massive QE is currently the only thing keeping the CPI above 1.5%. We're afraid the patient is going to run out of the ICU when the patient is still on life support.

https://fred.stlouisfed.org/series/WALCL

The Fed's own estimate of CPI in 2021 is 1.9%. Fed estimates have typically been missed for many years now; they're usually on the high side which is how they keep raising rates prematurely, as in 2016.

https://www.minneapolisfed.org/about-us/monetary-policy/inflation-calculator/consumer-price-index-1913-

I could be wrong. Inflation could go up 2.5% in 2021, another 3.5% in 2022, 4.5% in 2023... and for whatever reason during all this time Jerome Powell and company decide NOT to stop buying billions in assets per day, decide NOT to sell any of the Fed's assets, and decide NOT to raise interest rates. Then inflation goes to 6%+ in 2024, etc... That's the narrative, and it absolutely requires the Fed to sit idly by - for years - with QE and ZIRP policies while it happens.

I don't see that scenario as likely. The Fed is now more powerful than it has ever been in American history, because they have an $8T war chest of assets that can be sold to yank money out of the economy, comprising a full 40% of M3 that can be utterly erased with the click of some buttons. Plus they are at an interest rate starting point near zero. Powell and Co. have a license to kill inflation and the weapons to do it - not a doubt in my mind.

IMO, we should be more worried about bubbles and a deflationary recession than inflation.

That said, if 5-10% inflation did come to pass, I would not want to be leveraged on real estate. In the 1970's, house prices were essentially the cost of construction, which was tied directly to inflation, making housing a great inflation hedge. Today house prices are driven by the low cost to finance them for 30 years, particularly in HCOL areas where a house that costs $200k to build is worth over $1M, or in MCOL areas, where it costs $400k. If mortgage rates go from 3% to 6%, the cost of financing each $100k for 30y goes from $421.60 to $599.55 per month, a 42% drop in affordability. When all houses across the market become 42% less affordable, you can guess what will happen to prices. Only a portion of this loss is justified by the higher cost of construction if most of one's home value is not related to the cost of construction, and rising construction costs are accompanied by rising insurance costs too.

Think of it this way. If stocks were booming due to cheap margin, would you make a long-term commitment to stocks if you felt that margin rates were about to go up?

So I think a lot of what you say makes sense on a historical basis, but I do not think that the governmet/fed/central banks are thinking of this in the same way as they have historically.

I firmly believe that the role of the central bank has been expanded and no longer has much to do with preserving stability of the currency. Now they are looking for full "inclusive" employment. The fed in the states (As well as the bank of Canada) are now more a tool of the federal governments.

All the talk of raising rates I think is a non starter. Rates simply cannot rise. Whatever manipulation needs to happen to prevent rates from rising, will absolutely happen. That is my prediction. We may even see negative rates. It is the only way the entire west can avoid defaulting.

When I say I think inflation is coming, I do not necessarily believe it will be acknowledged; but I DO believe purchasing power will be drastically reduced even if "CPI" is reported as a low number.

The U.S. Fed's two-part mandate to maximize employment and optimize inflation is itself a compromise between Democrats (who want full employment) and Republicans (who have an interest in low inflation). So far, I think the Fed gets an "A" for maximizing both functions simultaneously, regardless of whichever party is in control. Prior to the pandemic, unemployment was only 4% and inflation was <2%. Post-pandemic, unemployment is only 6% and inflation still <2%. By early 2022, we'll be back in the 4% range, which is remarkable considering how many people are always switching jobs, having health issues, between jobs, etc. I'd say 4-5% unemployment is "full employment". Compared to many other countries, the U.S. has a firm grip on its economy.

You are correct that rates simply cannot rise. A bond/mortgage/real estate financial crisis would ensue if rates rose just 2%, which would cause unemployment. Convexity becomes huge at lot interest rates. Additionally, a lot of businesses would shut down activities that are generating 5% returns and only made sense when financed with debt at 4%. This is the one-way street to Japanification we've been on for many years. The Fed hopes we can avoid a lost decade or two if they can maintain inflation at 2-3%, the optimum for economic growth.

The catch would be if interest rates rose in competing currencies. As hard as it is to imagine, rising rates in the yen, euro, pound, yuan, etc. would cause relative devaluation of the dollar. This would be great for US exporters, but it would show up in CPI/PPI. Would the Fed hold off on policy changes if inflation was being driven by imports (i.e. other countries' inflation)?

You are also correct that purchasing power is being reduced, but it's not for things like consumer staples, consumer durables, food, or energy that count toward CPI. Low interest rates are fueling higher and higher valuations for investable assets. That means we'll have to pay more for housing and have to save more for retirement. When we have to spend more on such things, our purchasing power is reduced even in a low-inflation economy. The solutions are to lock in low housing costs (at low interest rate risk) by buying in a LCOL area, to set very ambitious savings targets, and don't try to retire until one hits a 3.5% or 3.75% WR. The net effect on the FIRE crowd is similar to what inflation would do, but it's not inflation.

I disagree with your assessment of the situation. I think you are correct in terms of the numbers which are reported, but I think the numbers are just lies. I think the fed has not contained inflation, despite what they say.

The government and the fed NEED inflation to be reported as zero bound. This is the only way they have political license to continue low interest rates, and buying debt. If that pony show comes to an end, and rates rise, or the fed stops buying debt, the whole system comes down. This is the same in most of the developed world.

So they can say inflation is 1-2% all they want, but anyone who buys houses, cars, food, clothes, gas knows its not the case. When I originally said that we are in for a decade of 5-10% inflation, I guess I could have also specified that I do also firmly believe it will be reported as much much less than that.

[bacchi]

The government and the fed NEED inflation to be reported as zero bound. This is the only way they have political license to continue low interest rates, and buying debt. If that pony show comes to an end, and rates rise, or the fed stops buying debt, the whole system comes down. This is the same in most of the developed world.

March CPI was 0.6% and the yoy was 2.6%, setting the May I-bond rate to 3.54%. The April numbers are due the 12th and will likely show an increase as well.

[bwall]

I disagree with your assessment of the situation. I think you are correct in terms of the numbers which are reported, but I think the numbers are just lies. I think the fed has not contained inflation, despite what they say.

The government and the fed NEED inflation to be reported as zero bound. This is the only way they have political license to continue low interest rates, and buying debt. If that pony show comes to an end, and rates rise, or the fed stops buying debt, the whole system comes down. This is the same in most of the developed world.

So they can say inflation is 1-2% all they want, but anyone who buys houses, cars, food, clothes, gas knows its not the case. When I originally said that we are in for a decade of 5-10% inflation, I guess I could have also specified that I do also firmly believe it will be reported as much much less than that.

You might be interested in learning who and how the Consumer Price Index (CPI) is calculated.

Here is a short article that tells us who calculates the CPI; https://www.investopedia.com/terms/b/bls.asp, the Bureau of Labor Statistics (BLS).
"The primary purpose of the BLS, an arm of the U.S. Department of Labor (DOL), is to research, assemble, and publish a range of statistical data on the labor market, prices, and productivity. This government agency goes to great lengths to ensure the accuracy, impartiality, and accessibility of its reports and the statistics it produces are among the most influential economic indicators for the American economy."

In short, the Fed doesn't calculate inflation, the Dep't of Labor does. Economists, statisticians, mathematicians and actuaries who are mainly interested in doing their job well, not providing political cover for any person or institution.

The CPI is calculated by reviewing the cost of a basket of goods. One reason that we're seeing high y/o/y inflation numbers is because 12 months ago, prices were falling rather quickly due to COVID. Perhaps it would be more meaningful to go back 24 months and divide by two to get the annual inflation rate. No one is doing this, though, because that's not how it's done.

+1 to @ChpBstrd 's analysis that deflation is a bigger worry than inflation and that inflation can be easily cured by sucking a lot of assets off the balance sheet. This wasn't an option the last time that the USA experienced a lot of inflation in the 1970's and 80's.

[Simpleton]

I disagree with your assessment of the situation. I think you are correct in terms of the numbers which are reported, but I think the numbers are just lies. I think the fed has not contained inflation, despite what they say.

The government and the fed NEED inflation to be reported as zero bound. This is the only way they have political license to continue low interest rates, and buying debt. If that pony show comes to an end, and rates rise, or the fed stops buying debt, the whole system comes down. This is the same in most of the developed world.

So they can say inflation is 1-2% all they want, but anyone who buys houses, cars, food, clothes, gas knows its not the case. When I originally said that we are in for a decade of 5-10% inflation, I guess I could have also specified that I do also firmly believe it will be reported as much much less than that.

You might be interested in learning who and how the Consumer Price Index (CPI) is calculated.

Here is a short article that tells us who calculates the CPI; https://www.investopedia.com/terms/b/bls.asp, the Bureau of Labor Statistics (BLS).
"The primary purpose of the BLS, an arm of the U.S. Department of Labor (DOL), is to research, assemble, and publish a range of statistical data on the labor market, prices, and productivity. This government agency goes to great lengths to ensure the accuracy, impartiality, and accessibility of its reports and the statistics it produces are among the most influential economic indicators for the American economy."

In short, the Fed doesn't calculate inflation, the Dep't of Labor does. Economists, statisticians, mathematicians and actuaries who are mainly interested in doing their job well, not providing political cover for any person or institution.

The CPI is calculated by reviewing the cost of a basket of goods. One reason that we're seeing high y/o/y inflation numbers is because 12 months ago, prices were falling rather quickly due to COVID. Perhaps it would be more meaningful to go back 24 months and divide by two to get the annual inflation rate. No one is doing this, though, because that's not how it's done.

+1 to @ChpBstrd 's analysis that deflation is a bigger worry than inflation and that inflation can be easily cured by sucking a lot of assets off the balance sheet. This wasn't an option the last time that the USA experienced a lot of inflation in the 1970's and 80's.

I do understand that it is a different "independent" department which is responsible for calculating it. I also think its highly unlikely that there is not political pressure involved.

The methodology they use to calculate inflation changes with the winds to whatever serves the political purpose.

Look at home prices as THE prime example. Home prices are skyrocketting, but the official inflation measures are flat because they look at the financing cost.  This is a microcosm of what I am saying. They need low interest rates to persist despite everything getting more expensive. They need the low inflation so they can keep the low interest rates.

Ultimately there is no political appetite to actually balance the books, so long as that persists, the only way the debt snowball keeps growing is with low rates. The only way low rates persist is with inflation that is reported to be low, no matter the reality.

[RWD]

Could you use exchange rates to get a sense of inflation relative to other nations to get an additional perspective? For example, in 2020 USD lost 7.76% in value relative to the Euro (source: xe.com) and the Euro had inflation of 0.91% (source: inflationtool.com). So that works out to 8.67% inflation for USD in 2020. Obviously you'd want to compare to more than just one currency for more data points. There are probably some additional factors here I'm not thinking of right now.

[GuitarStv]

Posting to follow.  I've been seeing a lot of higher prices for things, and was wondering if/when prices will go back to normal.

[bwall]

I do understand that it is a different "independent" department which is responsible for calculating it. I also think its highly unlikely that there is not political pressure involved.

The methodology they use to calculate inflation changes with the winds to whatever serves the political purpose.

Look at home prices as THE prime example. Home prices are skyrocketting, but the official inflation measures are flat because they look at the financing cost.  This is a microcosm of what I am saying. They need low interest rates to persist despite everything getting more expensive. They need the low inflation so they can keep the low interest rates.

Ultimately there is no political appetite to actually balance the books, so long as that persists, the only way the debt snowball keeps growing is with low rates. The only way low rates persist is with inflation that is reported to be low, no matter the reality.

If I understand your argument correctly, you are saying that they are not capturing inflation properly because they are looking at the monthly cost of housing, whereas they should be looking at the y/o/y price increase in a (hypothetical) house? Is that an accurate re-wording of your argument?

From the vantage point of the consumer, the BLS method is sound. They pay $X per housing unit per month and if low interest rates mean that their monthly payment stays low even in the face of higher prices, then how has the monthly cost of a basket of goods increased? If their monthly housing cost goes down due to low rates (say, by re-financing at a lower interest rate) even as their home goes up in value, then some might say it would be a perversion of statistics to claim that inflation in the basket of goods had occurred when in fact they had more money left over each month to spend due to re-financing.

I will let new car dealers confirm my argument. The salesmen there like to ask buyers 'What's your monthly budget?' or 'How much of a payment can you afford?" If a buyer's monthly transportation cost decreases due to '0% financing!' deals that we see from time to time, then how can that be measured as inflation?

Another problem with statistics is how to capture an increase in quality? In real terms, new automobile costs are falling every year. "But how can that be?!?! Prices are going up constantly!!!" The price might be going up, yes, but so is the quality. In 1968, cars had no modern day basics like airbags, air conditioning, seat belts, headrests (!!!) or late 20th Century additions like anti-lock brakes, fuel injection (no need to warm up a car these days), rust protection (cars used to rust out in less than 10 years). The 21st Century brought improvements like navigation, rear view cameras, back up sensors, tire pressure monitoring, bluetooth/hands free device interface, heated seats, etc. The list of improvements is practically endless. How does one account for the increased quality in the inflation statistics?

It's the same with housing: new 50 years ago houses had no microwave ovens, double paned windows, breaker boxes, central HVAC, microwaves, high quality insulation, swimming pools, much less granite or corian countertops, beautiful landscaping ('charm'), internet capability, and were generally about 1500 square feet or less. So in one sense the nominal housing price is increasing, but is it due to quality improvements, greater consumption('more room') or inflation?

Read more about the changes in American housing consumption habits here:
https://compasscaliforniablog.com/have-american-homes-changed-much-over-the-years-take-a-look/

According to that article, housing costs have remained flat (or dropped?) since the 1950's.

[Simpleton]

I do understand that it is a different "independent" department which is responsible for calculating it. I also think its highly unlikely that there is not political pressure involved.

The methodology they use to calculate inflation changes with the winds to whatever serves the political purpose.

Look at home prices as THE prime example. Home prices are skyrocketting, but the official inflation measures are flat because they look at the financing cost.  This is a microcosm of what I am saying. They need low interest rates to persist despite everything getting more expensive. They need the low inflation so they can keep the low interest rates.

Ultimately there is no political appetite to actually balance the books, so long as that persists, the only way the debt snowball keeps growing is with low rates. The only way low rates persist is with inflation that is reported to be low, no matter the reality.

If I understand your argument correctly, you are saying that they are not capturing inflation properly because they are looking at the monthly cost of housing, whereas they should be looking at the y/o/y price increase in a (hypothetical) house? Is that an accurate re-wording of your argument?

From the vantage point of the consumer, the BLS method is sound. They pay $X per housing unit per month and if low interest rates mean that their monthly payment stays low even in the face of higher prices, then how has the monthly cost of a basket of goods increased? If their monthly housing cost goes down due to low rates (say, by re-financing at a lower interest rate) even as their home goes up in value, then some might say it would be a perversion of statistics to claim that inflation in the basket of goods had occurred when in fact they had more money left over each month to spend due to re-financing.

I will let new car dealers confirm my argument. The salesmen there like to ask buyers 'What's your monthly budget?' or 'How much of a payment can you afford?" If a buyer's monthly transportation cost decreases due to '0% financing!' deals that we see from time to time, then how can that be measured as inflation?

Another problem with statistics is how to capture an increase in quality? In real terms, new automobile costs are falling every year. "But how can that be?!?! Prices are going up constantly!!!" The price might be going up, yes, but so is the quality. In 1968, cars had no modern day basics like airbags, air conditioning, seat belts, headrests (!!!) or late 20th Century additions like anti-lock brakes, fuel injection (no need to warm up a car these days), rust protection (cars used to rust out in less than 10 years). The 21st Century brought improvements like navigation, rear view cameras, back up sensors, tire pressure monitoring, bluetooth/hands free device interface, heated seats, etc. The list of improvements is practically endless. How does one account for the increased quality in the inflation statistics?

It's the same with housing: new 50 years ago houses had no microwave ovens, double paned windows, breaker boxes, central HVAC, microwaves, high quality insulation, swimming pools, much less granite or corian countertops, beautiful landscaping ('charm'), internet capability, and were generally about 1500 square feet or less. So in one sense the nominal housing price is increasing, but is it due to quality improvements, greater consumption('more room') or inflation?

Read more about the changes in American housing consumption habits here:
https://compasscaliforniablog.com/have-american-homes-changed-much-over-the-years-take-a-look/

According to that article, housing costs have remained flat (or dropped?) since the 1950's.

So you do summarize my argument well, but I guess I do not see the merit in the methods they use to calculate cpi.

To take housing as an example. I see this as the perfect microcosm of what is going on. Prices are skyrocketing, but they come up with a reason to state that no inflation is taking place. Similar to national debt, the prices and the debt going up need to continue, and the only way they can continue to go up is by having rock bottom interest rates. The only way you can politically justify rock bottom rates is to state that inflation is zero-bound - true or not.

Another obvious point is that not everyone finances mortgages or cars. The actual cost of the home is going up (or the dollar is going down), no matter how you spin it. If I want to pay cash, inflation is huge. Again, this is all about keeping the debt treadmill running. The fact that interest rates are low is also itself an indication that the dollar is in low demand, and is losing value.

In terms of quality, I do agree there is an argument to be made particularly as it comes to technology. This argument can also be made both ways. Take for example food price inflation. Over time the CPI has gradually shifted its weight away from steak and towards hamburger - this is justified because it was noted people are purchasing more hamburger and hence consumers apparently prefer hamburger. To that I pose the question - do people actually prefer hamburger, or are they simply shifting to lower quality products (hamburger) because they cannot afford steak as often.

Finally, while I do tend to think that inflation data has in the past (last half century) been understated, I think the manipulation has been small. I do think that going forward though inflation will need to be allowed to run, while being understated. It is the only way out of the massive debts that have been run up because the political will to balance the books does not exist - no politician will be allowed to do it.

[ChpBstrd]

I do understand that it is a different "independent" department which is responsible for calculating it. I also think its highly unlikely that there is not political pressure involved.

The methodology they use to calculate inflation changes with the winds to whatever serves the political purpose.

Look at home prices as THE prime example. Home prices are skyrocketting, but the official inflation measures are flat because they look at the financing cost.  This is a microcosm of what I am saying. They need low interest rates to persist despite everything getting more expensive. They need the low inflation so they can keep the low interest rates.

Ultimately there is no political appetite to actually balance the books, so long as that persists, the only way the debt snowball keeps growing is with low rates. The only way low rates persist is with inflation that is reported to be low, no matter the reality.

If I understand your argument correctly, you are saying that they are not capturing inflation properly because they are looking at the monthly cost of housing, whereas they should be looking at the y/o/y price increase in a (hypothetical) house? Is that an accurate re-wording of your argument?

From the vantage point of the consumer, the BLS method is sound. They pay $X per housing unit per month and if low interest rates mean that their monthly payment stays low even in the face of higher prices, then how has the monthly cost of a basket of goods increased? If their monthly housing cost goes down due to low rates (say, by re-financing at a lower interest rate) even as their home goes up in value, then some might say it would be a perversion of statistics to claim that inflation in the basket of goods had occurred when in fact they had more money left over each month to spend due to re-financing.

I will let new car dealers confirm my argument. The salesmen there like to ask buyers 'What's your monthly budget?' or 'How much of a payment can you afford?" If a buyer's monthly transportation cost decreases due to '0% financing!' deals that we see from time to time, then how can that be measured as inflation?

Another problem with statistics is how to capture an increase in quality? In real terms, new automobile costs are falling every year. "But how can that be?!?! Prices are going up constantly!!!" The price might be going up, yes, but so is the quality. In 1968, cars had no modern day basics like airbags, air conditioning, seat belts, headrests (!!!) or late 20th Century additions like anti-lock brakes, fuel injection (no need to warm up a car these days), rust protection (cars used to rust out in less than 10 years). The 21st Century brought improvements like navigation, rear view cameras, back up sensors, tire pressure monitoring, bluetooth/hands free device interface, heated seats, etc. The list of improvements is practically endless. How does one account for the increased quality in the inflation statistics?

It's the same with housing: new 50 years ago houses had no microwave ovens, double paned windows, breaker boxes, central HVAC, microwaves, high quality insulation, swimming pools, much less granite or corian countertops, beautiful landscaping ('charm'), internet capability, and were generally about 1500 square feet or less. So in one sense the nominal housing price is increasing, but is it due to quality improvements, greater consumption('more room') or inflation?

Read more about the changes in American housing consumption habits here:
https://compasscaliforniablog.com/have-american-homes-changed-much-over-the-years-take-a-look/

According to that article, housing costs have remained flat (or dropped?) since the 1950's.

The monthly cost, or the actual price paid, is also important because if BLS statisticians are going to calculate a cost of housing, they must include rented housing. Consider an extreme example: If condos in a place cost $500,000 each to buy, but apartments cost $1,000 a month to rent, is the cost of housing high in that place? It's high only if you choose to buy, rather than doing the more sensible alternative of renting. 

On the flip side, consider a place like where I live. Single family houses here cost about $2,000/month to rent, but the monthly payment to buy them is less than $1,000. The "cost of housing" is some kind of weighted average of the two very different prices for the same thing.

Also consider the car lot, where most people do not pay the sticker price, but rather negotiate it down by some amount that might vary over time. If the BLS statistician walked the lot, writing down sticker prices, they would get a false sense of how expensive cars are. If they asked the dealer how much their customers paid them per month, that would be a more accurate measure of the cost to the consumer. They would also have a number that could be compared to lease deals. The simple question "what are consumers paying for transportation by car" requires a lot of detail, nuance, and diligent process if the numbers are to be legit and comparable over time.

The actual cost of the home is going up (or the dollar is going down), no matter how you spin it. If I want to pay cash, inflation is huge. Again, this is all about keeping the debt treadmill running.

I agree that consumers face a risk of overpaying when interest rates are low. If interest rates go up, those monthly payments could go up too, which will deter people from paying as much as we originally paid for our houses, which results in lower prices. Whether through low interest rates or low prices, consumers are buying the biggest house for which they can afford the payments. This is another demonstration of how it's the monthly cost that matters from the consumer's perspective.

[Roland of Gilead]

Feels a bit like being slow boiled.  The government is saying there is no inflation and yet food, cars, housing, energy, building materials are all up 10% to 300% (in the case of building materials) and even Warren Buffett says his companies are going to increase prices this year by 10%.

[MustacheAndaHalf]

I'm not that familiar with how GDP growth interacts with inflation.  I believe the Fed predicted really high GDP growth this year, in the 5-6% range.  If we have $105 worth of goods that now cost $102 (like 2% inflation), does that leave the country with more wealth compared to the year before?

But that says nothing about how it gets divided up.

[bwall]

"

To take housing as an example. I see this as the perfect microcosm of what is going on. Prices are skyrocketing, but they come up with a reason to state that no inflation is taking place. Similar to national debt, the prices and the debt going up need to continue, and the only way they can continue to go up is by having rock bottom interest rates. The only way you can politically justify rock bottom rates is to state that inflation is zero-bound - true or not.

Another obvious point is that not everyone finances mortgages or cars. The actual cost of the home is going up (or the dollar is going down), no matter how you spin it. If I want to pay cash, inflation is huge. Again, this is all about keeping the debt treadmill running. The fact that interest rates are low is also itself an indication that the dollar is in low demand, and is losing value.

In terms of quality, I do agree there is an argument to be made particularly as it comes to technology. This argument can also be made both ways. Take for example food price inflation. Over time the CPI has gradually shifted its weight away from steak and towards hamburger - this is justified because it was noted people are purchasing more hamburger and hence consumers apparently prefer hamburger. To that I pose the question - do people actually prefer hamburger, or are they simply shifting to lower quality products (hamburger) because they cannot afford steak as often.

Finally, while I do tend to think that inflation data has in the past (last half century) been understated, I think the manipulation has been small. I do think that going forward though inflation will need to be allowed to run, while being understated. It is the only way out of the massive debts that have been run up because the political will to balance the books does not exist - no politician will be allowed to do it.

hmm..... it appears as if you didn't look at the link I'd included. That's ok, but it helps to understand the argument I'm trying to make. The link showed that the size of the average home in the USA is creeping up annually and it provided statistics as evidence. So, if there are more square feet in housing consumed per person, it would only make sense that the cost of housing is going up, right? In other words, that two hamburgers cost more than one is so readily obvious, pointing it out is borderline condescension. This is what's happening in housing over the course of decades and year to year. Same thing with technological improvements.

But, your main complaint now seems to be that the non-financed cost is going up, the 'cash price'. First, I'd say again, look at the link I sent and you can see that the house pricing isn't going up. It's flat. It doesn't appear so, b/c housing isn't consumed all at once like a hamburger, or even over the course of a few seasons, like clothing. It's consumed over a 30 year period (according to FANNIE MAE! :) ) or perhaps longer.

Therefore, if one did the math comparing a house purchase in 1986 (35 years ago) for, say $50,000 at 10% interest rate, which was the going rate back then, then over the course of the next thirty years the house would have cost a total of $157,962.88 to own. Which is the exact market price of that same house today, when paid in cash.

*I'm using a relative's house pricing in a LCOL area as a proxy for the whole market since I'm not old enough to have purchased a house in 1986. Sample size of 1, so, YMMV, but it backs up the link I quoted upthread. Loan calculator here https://www.bankrate.com/calculators/managing-debt/annual-percentage-rate-calculator.aspx

As a thought experiment and a way to prove/disprove my argument, are you able look at some of your older relative's houses, purchase prices, prevailing interest rates at time of purchase and make similar calculations?

[Simpleton]

"

To take housing as an example. I see this as the perfect microcosm of what is going on. Prices are skyrocketing, but they come up with a reason to state that no inflation is taking place. Similar to national debt, the prices and the debt going up need to continue, and the only way they can continue to go up is by having rock bottom interest rates. The only way you can politically justify rock bottom rates is to state that inflation is zero-bound - true or not.

Another obvious point is that not everyone finances mortgages or cars. The actual cost of the home is going up (or the dollar is going down), no matter how you spin it. If I want to pay cash, inflation is huge. Again, this is all about keeping the debt treadmill running. The fact that interest rates are low is also itself an indication that the dollar is in low demand, and is losing value.

In terms of quality, I do agree there is an argument to be made particularly as it comes to technology. This argument can also be made both ways. Take for example food price inflation. Over time the CPI has gradually shifted its weight away from steak and towards hamburger - this is justified because it was noted people are purchasing more hamburger and hence consumers apparently prefer hamburger. To that I pose the question - do people actually prefer hamburger, or are they simply shifting to lower quality products (hamburger) because they cannot afford steak as often.

Finally, while I do tend to think that inflation data has in the past (last half century) been understated, I think the manipulation has been small. I do think that going forward though inflation will need to be allowed to run, while being understated. It is the only way out of the massive debts that have been run up because the political will to balance the books does not exist - no politician will be allowed to do it.

hmm..... it appears as if you didn't look at the link I'd included. That's ok, but it helps to understand the argument I'm trying to make. The link showed that the size of the average home in the USA is creeping up annually and it provided statistics as evidence. So, if there are more square feet in housing consumed per person, it would only make sense that the cost of housing is going up, right? In other words, that two hamburgers cost more than one is so readily obvious, pointing it out is borderline condescension. This is what's happening in housing over the course of decades and year to year. Same thing with technological improvements.

But, your main complaint now seems to be that the non-financed cost is going up, the 'cash price'. First, I'd say again, look at the link I sent and you can see that the house pricing isn't going up. It's flat. It doesn't appear so, b/c housing isn't consumed all at once like a hamburger, or even over the course of a few seasons, like clothing. It's consumed over a 30 year period (according to FANNIE MAE! :) ) or perhaps longer.

Therefore, if one did the math comparing a house purchase in 1986 (35 years ago) for, say $50,000 at 10% interest rate, which was the going rate back then, then over the course of the next thirty years the house would have cost a total of $157,962.88 to own. Which is the exact market price of that same house today, when paid in cash.

*I'm using a relative's house pricing in a LCOL area as a proxy for the whole market since I'm not old enough to have purchased a house in 1986. Sample size of 1, so, YMMV, but it backs up the link I quoted upthread. Loan calculator here https://www.bankrate.com/calculators/managing-debt/annual-percentage-rate-calculator.aspx

As a thought experiment and a way to prove/disprove my argument, are you able look at some of your older relative's houses, purchase prices, prevailing interest rates at time of purchase and make similar calculations?

So I did look at your link, and I did acknowledge technological improvements (and by extention home sizes I guess) should play a role. Those are legitimate differences in preference and I do agree some increase in prices for larger sizes/better tech are warranted. They in no way explain the 30% jump in prices over the last year though.

I also do not think financing cost is a legitimate way to measure inflation. It would be like arguing that food is cheaper because I could buy my groceries on a cheaper line of credit than I could 30 years ago.

All that aside, I do think much of this is an aside from what I am arguing/predicting.

To make my point succinct I guess what I am saying is:
1. Governments in my opinion have always had an interest in understating inflation.
2. Government debt is bigger than almost any time in history for much of the world
3. Governments have no political will to pay this off through increased taxes/reduced spending.
4. Inflation is an easy way to reduce the debt - infact it has ALWAYS been the way to reduce the debt - it just has to get faster now.
5. Inflation will have to "officially" remain low to justify keeping interest rates low such that the debt actually gets eroded.
6. By extension of (5)- rates are completely fabricated since the government simply buys debt from itself via the fed to achieve whatever interest rate it can afford.

[Mrs. Burning Bush]

I have a working theory that inflation will be here in the 5-10% level for the coming decade.

Governments simply cannot afford to raise interest rates with their current debt levels, so interest rates will NEED to stay low. The act of ensuring they do not raise is inflationary and also has the benefit of reducing debt in the process. Many people claim central banks will have to raise rates to combat inflation - I simply don't believe that is the plan. This will be a big decade long financial reset.

Im not sure if you buy into my theory, but so far I do not think anything I have said is anything you havn't heard before, but what I am interested in is what I can do to plan for it. In my case, for Canadians.

Personally I have been thinking a lot about taking out a huge mortgage on a large, expensive primary residence. The capital gains would be made tax-exempt, and the debt reduced through inflation in the coming decade.

I have also been thinking about how the US has been moving up the capital gains taxes and how Canada will almost surely enact an even higher capital gains inclusion rate in the next budget - this is one of the advantages of inflation for governments - they can get the tax even if the real value doesnt go up. This is making me think a lot more about the advantages of dividend payors in my taxable accounts vs growth (a paradigm shift from convensional wisdom). I am also looking at investments in consumer staples and materials specifically.

Finally I have been thinking about pulling forward consumption with my cash. I will need a car in the next few years, its likely cheaper now than going forward, especially financed. Ditto for furniture.

If you have a similar view of what will happen with inflation in the coming decade, what are you doing to prepare for it?

Hi Simpleton.  Yes, I am in the school of thought that inflation is here, and coming in a bigger way.  An old boss told me many years ago that there are three ways a government can pay back debt:  raise taxes, cut benefits, and inflate the money supply (or any combination of the three).  When it comes to government doing the right thing, I am a pessimist (I believe their first, last and always goal is, once elected to get re-elected and to gain more power and the perks that come along with it - both parties here in the US, BTW, but enough politics).

So we have a contract to purchase a 2nd home in our favorite place (HCOL) in the U.S. with a 30 year mortgage at 3% +/-.  We will put down 20% to avoid mortgage insurance, and intend to pay the balance as slowly as possible.

Addressing your point above, what seems really tricky to me is how the fed will "control" inflation when the time comes by raising the overnight interest rate.  If treasuries returns to any where near normal rates, say, 5 to 6%, then the interest payments alone consume a HUGE portion of the federal budget.  Also with an inflating dollar, other countries and people in those countries are moving away from the dollar and into what, crypto, gold?  Is it happening now?  I'm not sure, but I think one can make a compelling case.

I even hope I am wrong - and if I am, I believe we will still be happy with our purchase.  Full disclosure:  I would have told you 10 to 12 years ago after/during the Great Financial Crisis that our response to it would have caused significant inflation, and most would agree it did not, and I was wrong.  As with all things, time will tell.

Regarding the debt, check out this link.  Even the "published" debt is scary, but the real unfunded liabilities is astounding.  https://www.truthinaccounting.org/about/our_national_debt?gclid=CjwKCAjwhMmEBhBwEiwAXwFoEabbYdOwCMJWjyRsWHEMsJ0VqazMsr-ywDtwbUjFLX7XC4PXDtlEnxoCqpIQAvD_BwE

[ChpBstrd]

To make my point succinct I guess what I am saying is:
1. Governments in my opinion have always had an interest in understating inflation.
2. Government debt is bigger than almost any time in history for much of the world
3. Governments have no political will to pay this off through increased taxes/reduced spending.
4. Inflation is an easy way to reduce the debt - infact it has ALWAYS been the way to reduce the debt - it just has to get faster now.
5. Inflation will have to "officially" remain low to justify keeping interest rates low such that the debt actually gets eroded.
6. By extension of (5)- rates are completely fabricated since the government simply buys debt from itself via the fed to achieve whatever interest rate it can afford.

If governments have an interest in understating inflation, it is so that the buyers of government bonds will demand lower yields. So the proposal is that governments seek to trick bond buyers into thinking inflation is lower than it actually is, so they will continue to buy treasuries yielding a lot less than the rate of inflation. This will allow governments to put off necessary tax hikes, spending cuts, and money supply expansion, which will then cause them to be more likely to win re-election.

Two issues:

1) Investors are already willing to buy government debt yielding less than the published rate of inflation. The one year treasury yields 0.06%, and the Fed's forecast inflation rate for 2021 is 1.9%. Should those investors declare "I've been hoodwinked!" if the final inflation rate published for 2021 is more like 2.5%? How does a buyer of German bunds with a negative yield expect to hold their purchasing power?

2) How long would such a deception work in hyper-competitive marketplaces? Wouldn't the first trader to figure out the truth make billions by going long commodities and short treasuries? If the deception has been going on for a long time, wouldn't we see hedge funds piling into this trade as more and more of them figure it out each year?

[Simpleton]

To make my point succinct I guess what I am saying is:
1. Governments in my opinion have always had an interest in understating inflation.
2. Government debt is bigger than almost any time in history for much of the world
3. Governments have no political will to pay this off through increased taxes/reduced spending.
4. Inflation is an easy way to reduce the debt - infact it has ALWAYS been the way to reduce the debt - it just has to get faster now.
5. Inflation will have to "officially" remain low to justify keeping interest rates low such that the debt actually gets eroded.
6. By extension of (5)- rates are completely fabricated since the government simply buys debt from itself via the fed to achieve whatever interest rate it can afford.

If governments have an interest in understating inflation, it is so that the buyers of government bonds will demand lower yields. So the proposal is that governments seek to trick bond buyers into thinking inflation is lower than it actually is, so they will continue to buy treasuries yielding a lot less than the rate of inflation. This will allow governments to put off necessary tax hikes, spending cuts, and money supply expansion, which will then cause them to be more likely to win re-election.

Two issues:

1) Investors are already willing to buy government debt yielding less than the published rate of inflation. The one year treasury yields 0.06%, and the Fed's forecast inflation rate for 2021 is 1.9%. Should those investors declare "I've been hoodwinked!" if the final inflation rate published for 2021 is more like 2.5%? How does a buyer of German bunds with a negative yield expect to hold their purchasing power?

2) How long would such a deception work in hyper-competitive marketplaces? Wouldn't the first trader to figure out the truth make billions by going long commodities and short treasuries? If the deception has been going on for a long time, wouldn't we see hedge funds piling into this trade as more and more of them figure it out each year?

To answer your issues:
1. Yes, debt is yielding less than inflation in many cases. There is a large demand for "safe" investments no matter the return; and on top of that, if yields continue to be pushed lower, the price of these bonds can be pushed up in the short term (though - if held to maturity still yield very little) However, the demand for this debt yielding less than inflation does not come close to meeting the supply of debt - therefore, enter the fed.

https://www.pgpf.org/blog/2021/04/the-federal-reserve-holds-more-treasury-notes-and-bonds-than-ever-before

Without the federal reserve buying the debt (which by my argument is essentially printing money), yields would have to raise dramatically to attract actual independent lenders. Very tough times/decisions would follow for the government. What they are doing is essentially financing a portion of our deficit/debt from irrational lenders, and printing the balance.  The interest rate is therefore essentially entirely under control of the fed based on how many marginal buyers of debt they knock out of the market place by filling demand with printed dollars.

2. I am not sure how long it will work. The market can remain irrational much longer than you or I would think. I don't think they can effectively short treasuries in a meaningful way because the fed simply buys all the debt the government needs to maintain an acceptable interest rate. However, I do think the prices of commodities are highly indicating that the long trades have already taken place.

https://www.worldbank.org/en/research/commodity-markets
https://www.spglobal.com/platts/en/market-insights/latest-news/oil/011821-infographic-a-new-supercycle-why-commodities-prices-surging-2021

[bwall]

I also do not think financing cost is a legitimate way to measure inflation. It would be like arguing that food is cheaper because I could buy my groceries on a cheaper line of credit than I could 30 years ago.

The analogy does not hold.
Food is consumed shortly after purchase, let's say 'immediately', since it's generally perishable, except in the case of spam or MRE's. By the same token, no one is offered credit for food purchases with a 30 year repayment horizon. The BLS calls these 'non-durable goods'.

Housing is consumed over a 30-50 year period, perhaps even longer because the house can reasonably be considered to still be standing and even resold after that time period, therefore still not completely consumed.  The BLS calls these 'durable goods'.

https://en.wikipedia.org/wiki/Durable_good

So, I've shown how durable goods have held their pricing or gone down over the course of decades. (Increased consumption habits, technological advances, etc)

The interesting question (for me, at least), is 'can the same argument be made for non-durable goods? Have the prices of non-durable goods gone up (or down) over the decades?

[Boll weevil]

Last I heard, the Fed’s operating theory is that the risk of inflation is low when unemployment is fairly high. As unemployment goes down, it becomes harder to get/keep workers, so wages have to go up to get/keep workers, leading suppliers to increase their prices.

That’s the reason I’m not worried about inflation from the “helicopter money”/“quantitative easing” behavior.

That being said, there’s an effort to raise the minimum wage to $15/hour or more, which is a little more than double what it is now. If and when that happens, I would expect some pretty significant inflation to follow, regardless of the unemployment rate.

[Metalcat]

What am I going to do about it?

I'll wait and see, I'll adjust my spending to minimize exposure to more inflated purchases. Like when cauliflower became a luxury good that one year, I didn't cook cauliflower.

My house is cheap, I technically don't need a car, and I'm a very good chef, so I can always adapt my meal plans to whatever is cheap.

Financially, I also have buffers, I have highly flexible spending, and I sustain the capacity to jump in and out of the job market with no concern for ageism or physical ability because I've engineered my skill set to be robust against that.

Basically? I just don't worry about it. I handle far more scary things than inflation, so this takes up exactly no real estate in my brain.

[trollwithamustache]

A lot of electons are gonna be wasted on bad explanations of bad monetary policy theory that will never be implanted the way the theory was written.

Remember, being Frugal, whether you use a capitol F or not, means buying less stuff. Which is an excellent defense against inflation.

[Simpleton]

I also do not think financing cost is a legitimate way to measure inflation. It would be like arguing that food is cheaper because I could buy my groceries on a cheaper line of credit than I could 30 years ago.

The analogy does not hold.
Food is consumed shortly after purchase, let's say 'immediately', since it's generally perishable, except in the case of spam or MRE's. By the same token, no one is offered credit for food purchases with a 30 year repayment horizon. The BLS calls these 'non-durable goods'.

Housing is consumed over a 30-50 year period, perhaps even longer because the house can reasonably be considered to still be standing and even resold after that time period, therefore still not completely consumed.  The BLS calls these 'durable goods'.

https://en.wikipedia.org/wiki/Durable_good

So, I've shown how durable goods have held their pricing or gone down over the course of decades. (Increased consumption habits, technological advances, etc)

The interesting question (for me, at least), is 'can the same argument be made for non-durable goods? Have the prices of non-durable goods gone up (or down) over the decades?

But do you not see this line of thought re:durable goods as statistical manipulation?

I understand the logic they are using, but I think all of this is an exercise in obscuring the fact that the value of your dollar (as measured in houses for this instance) has been massively reduced.

The cost of the house increases, while interest rates decline. The fact remains that the nominal value of the home increased. What has decreased is the price to borrow money - because money is becoming less valuable/desireable. Inflation.

Weather or not you can resale the home for the same price (ie it not being consumed) does not change the fact that you still need more dollars to exchange for that same house.

Since inflation should be a measure of the exchange value of the currency, I find it misleading to instead only measure the cost of financing something, especially when the federal reserve is using massive fiscal engineering to keep that cost artificially low.

[BicycleB]

I understand the logic they are using, but I think all of this is an exercise in obscuring the fact that the value of your dollar (as measured in houses for this instance) has been massively reduced.

The cost of the house increases, while interest rates decline. The fact remains that the nominal value of the home increased. What has decreased is the price to borrow money - because money is becoming less valuable/desireable. Inflation.

Weather or not you can resale the home for the same price (ie it not being consumed) does not change the fact that you still need more dollars to exchange for that same house.

Since inflation should be a measure of the exchange value of the currency, I find it misleading to instead only measure the cost of financing something, especially when the federal reserve is using massive fiscal engineering to keep that cost artificially low.

If houses were consistently bought in cash, I would also find it misleading. But since houses are often bought with debt that is repaid by fixed monthly payments, isn't the more correct measurement the monthly one?

More precisely, wouldn't the least misleading measurement be the one based on the actual percentage of homes bought by mortgage and the actual % bought in cash? For example, if 90% are bought by mortgage, the weighting should be 90% monthly versus 10% cash; if in that case monthly is not inflating and cash purchases are going up 20%, then inflation weighted to reflect overall population behavior would be 2% in the home purchase category, wouldn't it?

I suppose it depends on whether you are discussing general inflation, the measured rate that is intended to approximately measure the experience of the overall population or at least the overall economy, or what I'll call your personal inflation rate. If you expect to buy your own home in cash, and cash prices double, that could give you a "personal inflation rate" very different from the economy's.

PS. To answer the thread topic, I do prepare for inflation by:
1. Having a mortgage almost large enough to offset my small fixed future pension, my biggest inflation vulnerability as I see it
2. Bought REITs instead of some bonds as counterbalance to stocks in financial portfolio (though I still have bonds too)
3. Bought a few oil company warrants (kind of like buying commodities, but maybe more leverage)

Going forward, I may upgrade that by:
4. Replacing some more bonds with gold and/or commodities
5. Expanding the REIT and oil investment %, mostly or entirely by replacing bonds rather than stocks

My goal is generalized buffering against inflation to achieve approximate neutral impact, though I doubt I fully achieve that.

[Simpleton]

I understand the logic they are using, but I think all of this is an exercise in obscuring the fact that the value of your dollar (as measured in houses for this instance) has been massively reduced.

The cost of the house increases, while interest rates decline. The fact remains that the nominal value of the home increased. What has decreased is the price to borrow money - because money is becoming less valuable/desireable. Inflation.

Weather or not you can resale the home for the same price (ie it not being consumed) does not change the fact that you still need more dollars to exchange for that same house.

Since inflation should be a measure of the exchange value of the currency, I find it misleading to instead only measure the cost of financing something, especially when the federal reserve is using massive fiscal engineering to keep that cost artificially low.

If houses were consistently bought in cash, I would also find it misleading. But since houses are often bought with debt that is repaid by fixed monthly payments, isn't the more correct measurement the monthly one?

More precisely, wouldn't the least misleading measurement be the one based on the actual percentage of homes bought by mortgage and the actual % bought in cash? For example, if 90% are bought by mortgage, the weighting should be 90% monthly versus 10% cash; if in that case monthly is not inflating and cash purchases are going up 20%, then inflation weighted to reflect overall population behavior would be 2% in the home purchase category, wouldn't it?

I suppose it depends on whether you are discussing general inflation, the measured rate that is intended to approximately measure the experience of the overall population or at least the overall economy, or what I'll call your personal inflation rate. If you expect to buy your own home in cash, and cash prices double, that could give you a "personal inflation rate" very different from the economy's.

PS. To answer the thread topic, I do prepare for inflation by:
1. Having a mortgage almost large enough to offset my small fixed future pension, my biggest inflation vulnerability as I see it
2. Bought REITs instead of some bonds as counterbalance to stocks in financial portfolio (though I still have bonds too)
3. Bought a few oil company warrants (kind of like buying commodities, but maybe more leverage)

Going forward, I may upgrade that by:
4. Replacing some more bonds with gold and/or commodities
5. Expanding the REIT and oil investment %, mostly or entirely by replacing bonds rather than stocks

My goal is generalized buffering against inflation to achieve approximate neutral impact, though I doubt I fully achieve that.

I just think the whole way this is calculated is intentionally misleading.

The way I see it there are TWO separate indicators of rapid inflation (decreasing value of the dollar) taking place simultaneously:
(1a) Interest rates are zero bound - meaning the value of having money is decreasing.
(1b) The price of the home is increasing in nominal terms.

Somehow, the powers of the be, do not conclude that 1a+1b=2
They actually conclude that each separate indicator of inflation cancel each other out
They conclude that 1+1 = 0 because the cost of financing a home isn't changing much.

The way they successfully spin this, is by ignoring the entire return side of the equation. The return on capital for the lenders is just negated from the equation, and the consumer side is all that is counted.

It is known that rampant inflation heavily benefits debtors at the expense of creditors. This IS that. It is not the lack of inflation.

[BicycleB]

How is it rampant if the average effect is 2%/year?

Are you going to address the questions raised?

[Simpleton]

How is it rampant if the average effect is 2%/year?

Are you going to address the questions raised?

I did address your question.

-My position is that in both cases, financed or not, the price of the home would be up 20%. The number of dollars exchanged for the home is 20% more.
-If 90% of people finance the home, the home isn't getting cheaper due to lower interest rates. The home remains 20% more expensive.
-What is happening is lower borrowing costs are offsetting the inflation in home prices.
-Lower borrowing costs are ALSO a sign of the dollars value being eroded. Dollars are plentiful and they do not demand any return.
-To say that the fact that the payment remains the same is a signal that inflation is not occurring I think is completely misreading the situation. Inflation is 20% in your example no matter the purchase method.
-In the case of a cash purchaser, the buyer experiences the loss of value of his dollars. In the case of the mortgage owner the lender experiences the loss in value of the dollar (this makes sense because it is technically the lender who purchased the house for 20% more and is now getting the same payments back). In both cases the dollar has lost value though.
-This brings me back to my very first post where I advocated that a large low interest mortgage may be a good move at the moment.

[ChpBstrd]

The way I see it there are TWO separate indicators of rapid inflation (decreasing value of the dollar) taking place simultaneously:
(1a) Interest rates are zero bound - meaning the value of having money is decreasing.
(1b) The price of the home is increasing in nominal terms.

I could take the evidence of (1a) and arrive at a different narrative. From lenders' perspectives, the value of money is increasing, so they are willing to accept less and less of it as interest for making loans. I.e. they're working harder for less money, so money is more valuable to them.

Regarding (1b), should we say the rate of inflation is higher in Phoenix, AZ than it is in Southern Illinois? I get that there are regional differences in the prices of things like gasoline (Hawaii is always highest) and groceries (most fresh produce in Alaska arrives by plane) but if housing is peaking off the charts mostly in certain big metro areas is that a sign of a generalized loss of purchasing power across the U.S. or is that a sign of a housing bubble / supply disruption?

https://sparkrental.com/hottest-real-estate-markets/

To put it another way, did inflation skyrocket in 2004-2007 as the housing bubble inflated, particularly in California, Nevada, Arizona, and Florida, and did we then enter a multi-year period of currency devaluation when these prices returned to earth? Here's a fun visualization of housing price changes across 2007-2017. Ask yourself: Are we are watching the value of a currency fluctuate or are we watching overpriced assets go down and underpriced assets go up?

https://howmuch.net/articles/median-house-value

[Simpleton]

The way I see it there are TWO separate indicators of rapid inflation (decreasing value of the dollar) taking place simultaneously:
(1a) Interest rates are zero bound - meaning the value of having money is decreasing.
(1b) The price of the home is increasing in nominal terms.

I could take the evidence of (1a) and arrive at a different narrative. From lenders' perspectives, the value of money is increasing, so they are willing to accept less and less of it as interest for making loans. I.e. they're working harder for less money, so money is more valuable to them.

Regarding (1b), should we say the rate of inflation is higher in Phoenix, AZ than it is in Southern Illinois? I get that there are regional differences in the prices of things like gasoline (Hawaii is always highest) and groceries (most fresh produce in Alaska arrives by plane) but if housing is peaking off the charts mostly in certain big metro areas is that a sign of a generalized loss of purchasing power across the U.S. or is that a sign of a housing bubble / supply disruption?

https://sparkrental.com/hottest-real-estate-markets/

To put it another way, did inflation skyrocket in 2004-2007 as the housing bubble inflated, particularly in California, Nevada, Arizona, and Florida, and did we then enter a multi-year period of currency devaluation when these prices returned to earth? Here's a fun visualization of housing price changes across 2007-2017. Ask yourself: Are we are watching the value of a currency fluctuate or are we watching overpriced assets go down and underpriced assets go up?

https://howmuch.net/articles/median-house-value

Your conclusion Re:1A I think is backwards. I do not think you can draw that conclusion. The lender is willing to accept less and less money in return because they have no demand for the dollars. Lower demand = lower value. They always want the best value for their dollar (highest risk adjusted interest rate), and that best value has been eroded.

Regarding your questions about localized variation in home prices, I would say that is exactly right and I agree with you. It is simply more expensive now to live in big cities than it was 20 years ago. Home/rent prices have locally gone up in big cities and I would agree that is an example of localized inflation. Locally the dollar has lost value against homes. Between 2004 and 2007 inflation did skyrocket as it became much more expensive to live the same lifestyle in the same home compared to the years before.

Finally, I would also agree that if home prices come down, that does indeed constitute deflation since the value of the dollar has increased against the price of a home.

It is not a question of assets going up, or the currency going down. It is both simultaneously. It is like saying the CAD has appreciated 10% against the USD. It is equally true that the USD depreciated 10% against the CAD.

[BicycleB]

How is it rampant if the average effect is 2%/year?

Are you going to address the questions raised?

I did address your question.

-My position is that in both cases, financed or not, the price of the home would be up 20%. The number of dollars exchanged for the home is 20% more.
-If 90% of people finance the home, the home isn't getting cheaper due to lower interest rates. The home remains 20% more expensive.
-What is happening is lower borrowing costs are offsetting the inflation in home prices.
-Lower borrowing costs are ALSO a sign of the dollars value being eroded. Dollars are plentiful and they do not demand any return.
-To say that the fact that the payment remains the same is a signal that inflation is not occurring I think is completely misreading the situation. Inflation is 20% in your example no matter the purchase method.
-In the case of a cash purchaser, the buyer experiences the loss of value of his dollars. In the case of the mortgage owner the lender experiences the loss in value of the dollar (this makes sense because it is technically the lender who purchased the house for 20% more and is now getting the same payments back). In both cases the dollar has lost value though.
-This brings me back to my very first post where I advocated that a large low interest mortgage may be a good move at the moment.

We certainly agree on the mortgage part - that it's an excellent inflation hedge.

Fwiw, I'm not quite seeing how your answer addresses my questions. It looks like you're repeating your position, not answering my questions. Sorry if I'm missing something obvious.

I'm not primarily seeking agreement, nor expecting to convince you. I'm seeking understanding, mostly to figure out if I'm missing something that you see. Still a bit baffled. Maybe we're measuring with different purposes in mind.

Your primary focus is on the cost of a house bought in cash. Is there a reason that's the primary example? (Sorry if I missed that part.)

Do you believe that all prices go along with the house price?

If house prices change but other prices don't, or if other prices change less on average than houses, how would you measure inflation for the overall economy? How would you decide what % of the whole that house price is?

I normally would want to measure for the economy as a whole, much as economists do, because that gives me information I can apply to varied scenarios in planning my life, and also because I like to understand what my fellow citizens experience. So for me, the question is "What do dollars get spent on, and how many dollars will be needed to buy those things next year?" That's hard to know for sure, therefore I  like the economists' answer "Well, over a wide range of examples measured, the average change since last year is 1.9%, so probably 1.9% modified by any new information relevant to what thing you're buying." 

In that mindset, the right "weight" of house prices compared to the whole could be measured in at least two reasonable ways that I can see. One is to measure how much each person pays for housing per month, in which case the interest rate offset is relevant, and in the example we've been discussing, inflation may be low if most people borrow for their purchase (perhaps 2%). The other way is, as you prefer, to count only purchase prices. In that case, certainly a 20% rise in purchase price is huge and very real. But in the purchase price method, if we consider the whole population, only a tiny fraction buy houses in a given year. If 10% buy houses, and the house prices are up by 20%, the price per person of housing paid this year still only goes up by 2%. Logically, inflation is still a low number for the group.

I think economists' normal measurements capture this spreading out of price increases, and accurately produce averages like 2% for overall inflation (even though house prices include previous years' increases, and surely that's more than 2%, though with other things averaged in too, maybe it's 2% overall.) The gap between individual prices for rare transactions and the lower average is because not everyone is doing the rare transactions. (Fwiw, that also makes me suspect that the measurements aren't intentionally misleading. They're not even misleading at all, unless the question you ask is different from what the measurement is designed to answer.)

(Incidentally, I'm curious. Previously, when asked why statisticians would intentionally mislead, you basically said they work for a living and their bosses have a vested interest in pretending inflation is low, so they produce the desired result. Plausible, though quite a contrast to what I heard years ago from professors in stats classes whose graduates often work as statisticians. I'm curious as to a different question: What makes you think that they mislead? Not what reason do you think they have - rather, what evidence or data or suggestive hints have you seen, which has convinced you?)

Re inflation generally, I might still be missing something. It's certainly true that for an individual cash buyer, houses really are about 20% higher - not just in the example, but across the country since last year, from what I read. Where I live, it's more like 30%!

Eventually, everyone who buys a house will pay a higher price (unless prices go back down). But will everyone pay 20% more each year? Or will everyone pay 20% more over a long period of time, like 10 years, so that the average change is 2%/year?

Are you thinking that what inflation should mean is "How much more would I have to pay IF I buy", rather than "How much more ARE people paying?"

[Telecaster]

I do understand that it is a different "independent" department which is responsible for calculating it. I also think its highly unlikely that there is not political pressure involved.

The methodology they use to calculate inflation changes with the winds to whatever serves the political purpose.

Look at home prices as THE prime example. Home prices are skyrocketting, but the official inflation measures are flat because they look at the financing cost.  This is a microcosm of what I am saying. They need low interest rates to persist despite everything getting more expensive. They need the low inflation so they can keep the low interest rates.

Ultimately there is no political appetite to actually balance the books, so long as that persists, the only way the debt snowball keeps growing is with low rates. The only way low rates persist is with inflation that is reported to be low, no matter the reality.

A lot to unpack in this thread.  But first, you are the victim of some bad information.    Whoever told you  the "official explanation" that CPI housing costs are stable because financing costs are low is completely full of shit.   Financing costs are not including in CPI.  The reason is because the purchase price of housing units itself isn't included.  CPI housing costs are based on rent, not purchase price. 

But my main point is that interest rates are ultimately set by the free market.   The whole world works on a credit system.  Wages, mortgages, etc. all are based on future payments.  If the time value of money--partially expressed as interest rates--isn't reflected in future prices, then everyone would go broke. 

This means two things:  First, if inflation rises, the Fed can't stop interest rates from rising.  They will rise on their own, and nobody will buy government bonds if the rate is too low so government rates will have to follow, at least to a certain extent.   Second, high-ish inflation is terrible for the economy.    From a debt service standpoint the only thing that is worse than high interest rates is no economic growth.   So if debt service is truly the concern, then I don't see the Fed letting inflation get out of control.

As an aside, I am a card-carrying member of the Do Not Pay Off Your Mortgage Club.   Over time, even small amounts of inflation will lower the true cost of your mortgage.   So why use fully valued dollars today to save shrunken dollars in the future?   

[Simpleton]

I think one of the big disconnects we are having is that I am not referring exclusively to Consumer Price Index. I do think CPI increases are coming too, but I am talking and arguing more broadly about general inflation; general devaluation of the currency.

I am going to try to respond to both of you in 1 post.

To respond to BicycleB:
-I picked home prices for no reason other than that was focused on through this thread. Its also the one which I feel is interesting based on the finance vs purchase price debate we are having.
-Overall inflation would need to be measured, I agree, based on what the average person spends on each category
-Your line of reasoning that because most people finance and therefore don't have rising payments I have already addressed above. I point out in my previous posts that I think this is intentionally misleading as it ignores the whole other party involved in the transaction (the one actually buying the house - the bank).
-As for what evidence I have of statisticians intentionally misleading? My opinion on the previous point and previous post is my basis. I think it is a way of framing the measurement which shows low inflation by neglecting to measure the effects on the party doing the financing - the bank. It is an intentionally narrow measurement.
-As for your last point, I DO think it should be measured as "IF I buy". This is again the same argument because how much the consumer is paying when financing, is not 100% of the story.
-No amount of smoke and mirrors changes the fact that the home costs more dollars.

To respond to Telecaster:
-I was not aware that CPI looks at just rents, but I do not think that really alters my argument re:inflation. The fact remains the dollar (as measured in houses, decreases in value)
-CPI is just a narrow way of looking at a (sizeable) part of overall inflation.
-Infact as MMM readers we should be much more concerned with API (asset price inflation). Assuming your wage remains the same, it takes much longer to save for retirement if the price of stocks have doubled, but yield remains unchanged (unless you already have the stocks).
-I did address in a previous post that my opinion is that the Fed is manipulating interest rates. I think this is no secret and is actually stated objective.
-I do think the fed/government can stop interest rates from rising - its as simple as printing dollars and handing them out. Why pay interest on a loan when you can just be given money? This is what they are doing on a social level with stimulus, and also what they are doing on a national level via the fed buying government debt.
-I do agree, the fed/government simply cannot let interest rates get out of control - they will do everything to avoid it.

[BicycleB]

Simpleton, thanks for the explanation!

-As for what evidence I have of statisticians intentionally misleading? My opinion on the previous point and previous post is my basis. I think it is a way of framing the measurement which shows low inflation by neglecting to measure the effects on the party doing the financing - the bank. It is an intentionally narrow measurement.

It sounds to me like you are assuming they intend to mislead, primarily because that seems to you to be the likely explanation based on how the statistic works. You haven't given any evidence beyond the stat itself. You're welcome to your opinion, but with due respect, it's not relevant evidence.

As someone trained in stats (modestly, as part of a relevant major), who worked in other agencies but could easily have ended up in a stats promulgating one, my guess is still that they're not so likely to intentionally mislead. Of course my only evidence is old opinions from insiders' mentors, a bit of relevant training from college study, and a stream of written references over decades where the calculation process has been debated, defined and explained in detail. None of that's proof either, of course. Anyway, no further questions.

I think one of the big disconnects we are having is that I am not referring exclusively to Consumer Price Index. I do think CPI increases are coming too, but I am talking and arguing more broadly about general inflation; general devaluation of the currency.

^Really interesting remark! I usually think of CPI as a measure of general inflation, but you make a legitimate point that assets have of course between rising much more than consumer prices. Surely you're correct that a measure including them would be broader. The point that this could make reaching FIRE take longer is a good one too imho. Again, thanks for clarifying.

[Mrs. Burning Bush]

I do understand that it is a different "independent" department which is responsible for calculating it. I also think its highly unlikely that there is not political pressure involved.

The methodology they use to calculate inflation changes with the winds to whatever serves the political purpose.

Look at home prices as THE prime example. Home prices are skyrocketting, but the official inflation measures are flat because they look at the financing cost.  This is a microcosm of what I am saying. They need low interest rates to persist despite everything getting more expensive. They need the low inflation so they can keep the low interest rates.

Ultimately there is no political appetite to actually balance the books, so long as that persists, the only way the debt snowball keeps growing is with low rates. The only way low rates persist is with inflation that is reported to be low, no matter the reality.

A lot to unpack in this thread.  But first, you are the victim of some bad information.    Whoever told you  the "official explanation" that CPI housing costs are stable because financing costs are low is completely full of shit.   Financing costs are not including in CPI.  The reason is because the purchase price of housing units itself isn't included.  CPI housing costs are based on rent, not purchase price. 


.   The whole world works on a credit system.  Wages, mortgages, etc. all are based on future payments.  If the time value of money--partially expressed as interest rates--isn't reflected in future prices, then everyone would go broke. 

This means two things:  First, if inflation rises, the Fed can't stop interest rates from rising.  They will rise on their own, and nobody will buy government bonds if the rate is too low so government rates will have to follow, at least to a certain extent.   Second, high-ish inflation is terrible for the economy.    From a debt service standpoint the only thing that is worse than high interest rates is no economic growth.   So if debt service is truly the concern, then I don't see the Fed letting inflation get out of control.

As an aside, I am a card-carrying member of the Do Not Pay Off Your Mortgage Club.   Over time, even small amounts of inflation will lower the true cost of your mortgage.   So why use fully valued dollars today to save shrunken dollars in the future?

I am not so sure the above is true anymore.  In fact, I think it is mostly not true today.  For the last several years, what we have had is irresponsible government(s) that borrow more and more.  The fed reserve bank of NY (another de facto branch of the government) creates money digitally (printing is way too slow) and buys the bonds issued by the treasury.  The fed reserve bank is now by far, the largest holder of U.S. Treasury instruments.  So, I ask, is that truly a free market setting the interest rates?

[Imanuels]

I've been pondering about the same recently. In a truly free market situation, the interest rates would have to be driven up - simple supply vs demand argument. However, since FED can change the demand side of the equation 'no limit', they can keep the interest rates low as long as needed.

[Metalcat]

Okay, so I haven't read many of the responses in detail because I hate trying to read walls of text on my phone, plus I largely don't care about the details, and I don't even live in the US.

Overall though, people seem to think that there are some economic impacts coming that will affect their day to day lives.

But I haven't seen much in the way of answering the question the OP asked, which is what, if anything, do people plan to do to manage this?

[EvenSteven]

Having read most of the posts here, I'd say there are three things being proposed:

1) There's not much we can do other than avoid putting too much money in long term bonds, so buckle up and enjoy the ride.

2) Take out long term low interest rate non-callable debt (e.g. take out a mortgage on ones house) and invest the money. 

3) Move investment money into gold/commodities.

My personal view of the three strategies is:

#1 is good if we have inflation, perhaps bad if there is a big stock market crash without inflation.

#2 is good if we have inflation, perhaps bad if we have a real estate crash and/or significant deflation.

#3 is good if we have inflation, bad in most other scenarios since the long term expected inflation adjusted return on investments in commodities/gold is zero, or even negative for commodities with significant storage costs.

Did I miss stuff others have proposed?

You missed my favorite one so far:

Remember, being Frugal, whether you use a capitol F or not, means buying less stuff. Which is an excellent defense against inflation.

[Metalcat]

Ha! Okay, yes you are right I did miss that one and it's an important point.

Lol, it also basically amounts to "keep on keeping on".

That's why I was wondering if anyone is actually proposing anything actionable that they actually intend to do in response to this.

If no, then I just won't give it much thought, which was basically my plan all along.

[djadziadax]

3) Move investment money into gold/commodities.

#3 is good if we have inflation, bad in most other scenarios since the long term expected inflation adjusted return on investments in commodities/gold is zero, or even negative for commodities with significant storage costs.

Commodity proxies, companies that produce commodities, miners, steelmakers, lumbar, etc, will be a good hedge against inflation. Commodities indexes are also good. I follow steel - steel prices have doubled from December, with futures contracts in unseen territory. The entire steel sector is on fire with no end in sight.

My general view on inflation, if it materializes:

I like the non-consumer defense against inflation as Malcat mentioned - consume less, buy things now that would last for 20 years. Don't pay retail. Subscribe to Buy Nothing groups, shop second hand on Craigslist. Etc.

Make home energy efficient, learn to turn down the thermostat, get an electric car, or electric bike, or a regular bike with a trailer, etc. etc.

People still lived through the 70's inflation, still started businesses, had kids, went to college, drove their cars, etc.

We as Mustachians are in incredibly robust position with lots of assets, and minimal needs/spend. We are robust against all kinds of shocks.

[Telecaster]

Lol, it also basically amounts to "keep on keeping on".

That's why I was wondering if anyone is actually proposing anything actionable that they actually intend to do in response to this.

If no, then I just won't give it much thought, which was basically my plan all along.

There's not a lot you can do, really.   Inflation doesn't seem to matter a whole lot until it gets to about 5% or so.   Above that, businesses start to have a hard time passing costs along fast enough.  Not making money depresses stock prices. 

I personally don't think it will get to that point.  The current Federal funds rate is about 0.25%.  Interest rates could go up a lot and still be about normal compared to historical standards.