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Do You Believe the Published Inflation Rate, or Do You Know Better?

Darren V. Long, Senior Analyst, As Published on NuWireInvestor.com

Economists today exclude food and energy from their “core” inflation statistics, as if no one has to eat or drive anywhere. In January, I will embark upon my yearly trek to grab a “basket of groceries”— some 20 or so items that include the normal things that we use, from orange juice to cereal, milk to eggs and so on, and report on the Year over Year costs. Don’t be surprised if they are, in fact, more than one-to-two percent higher in price than last year. Over the past four years that I have recorded these costs, the basket of goods has risen more than the rate of inflation — calculations for common folks. Not statistics and nonsense wrapped up in complex measurement stats and nonsense data, which get changed at the whim of those who need to paint a better economic picture.

In Canada, we are often lulled into a false sense of financial security and the Canadian economy by the mainstream media. I often read articles that play down inflation with sound bites such as, “Assuming Washington politics doesn’t get in the way, there’s still reason for optimism.” It is the type of verbiage and talk around the issue of inflation in the Canadian economy and many mainstream articles’ key points that “we shouldn’t worry at all because there is no inflation.”

Last week, Mark Carney’s successor, Stephen Poloz, decided to maintain interest rates at historically low levels, similar to our brethren in the U.S. The Bank of Canada has re-forecast a 1.8 per cent real gross domestic product (GDP) growth in the third quarter and 2.3 per cent GDP growth in Q4. That’s down sharply from a previous forecast of 3.8 per cent in Q3 and 2.5 per cent in Q4. Next year, growth is expected to come in at 2.3 per cent. Again, that’s down from the Bank’s July forecast of 2.7 per cent. Of course, the softer numbers are attributable largely to a weakening U.S. recovery in the Bank of Canada’s opinion. Last week’s statement noted that: “The U.S. economy is softer than expected but as fiscal headwinds dissipate and household deleveraging ends, growth should accelerate through 2014 and 2015.”

In all things related to inflation, I often look to only a few categories for a true snapshot. The main items are food, oil and housing. As a critic of the current CPI tools used to measure inflation, I am swift to point out that most of the world’s governments have understated inflation for political advantage. Stable inflation looks good to voters and for the bottom line, especially when cost of living adjustments and payments to social programs are indexed to it. In addition, this keeps government-borrowing costs lower, which is a key factor as to why our government likes these low interest rates.

Remember 2008? Crude oil used in the manufacturing of our gas in Canada briefly spiked to near $150 per barrel, and as the price per litre rose to a Canadian average of $1.40 by July, we were up in arms, complaining to our MPs of a contrived, manipulative, manufactured pricing scheme that was burning a hole in the pocket of every Canadian.

Fast-forward to November 5th 2013, and the price of a barrel of WTIC crude oil is trading at slightly over $94 per barrel, a decrease of over thirty-seven per cent in some three-and-a-half years. Yet we continue to pay a Canadian average of $1.24 per litre, a decrease of only about 11 per cent. We should be paying no more than about $.91-$.95 cents per litre. If this is not inflationary I do not know what is. Gone are the pricing conspiracies and the complaints. Here is the good ole Canadian way to forgive and forget.

This discussion about real inflation is pointless unless you realize what I have realized since 2004 when I began investing in bullion. Hard assets such as gold and silver are owned when there is a strong expectation of inflation. They are owned when people are concerned about the value of the dollar and inflation is a further symptom of this problem. It is the silent killer of your wealth. Governments, by painting this picture of stability — and some even argue risk of deflation — are able to continue on creating currency and thereby fuel real inflation. We are in the middle of a very wicked science experiment, the likes of which we have historically never witnessed, nor for which we have any empirical database on which to draw upon. We are the guinea pigs.

But don’t take my word for it. ShadowStats.com actually shows U.S. real inflation to be approximately 8 per cent to 9 per cent. Canada is not much different.


In the chart above, ShadowStats.com shows the SGS-Alternate CPI estimate based on the methodology, which was employed prior to 1980 when hedonic adjustments were not being made. Real inflation today is at eight to nine per cent, and not the CPI of two per cent. Chart Courtesy of ShadowStats.com

Further, investment expert Jim Rogers recently criticized Western central banks for minimizing the true inflation rate, which he says is likely closer to six per cent or seven per cent, impacting the middle class greater than ever before. Take your pick: six per cent to nine per cent, not the CPI two per cent as governments would have you believe.

From JimRogersInvestments.com: “The price of nearly everything is going up. We have inflation in India, China, Norway, Australia — everywhere but (the world’s largest economy) the U.S. Bureau of Labor Statistics. I’m telling you they’re lying. Go to a restaurant in New York, or a grocery store, and tell me that there’s no inflation … In 2001, it cost $9 to go to the top of the Empire State Building. Now it’s $27 to go to the 86th floor, $44 to go to the top and $67 to go express. The Museum of Modern Art in 2001 was $10, now it’s $25. A cab from Kennedy airport to Manhattan in 2001 was $30 plus tolls. Now it starts at $52.”

Although the Canadian middle class can be negatively impacted by understated inflation, they are partially insulated if they own a home — as long as they are not evaporating the equity, of course — or hard assets that are rising in value with inflation. There is no doubt the housing sector in Canada has had a stellar decade of gains. However, in the last ten years, gold has risen an astounding 247 per cent while silver has managed an incredible 339 per cent!

A major potential problem is brewing. If things are tight for the middle class now, they are going to get a whole lot tighter when interest rates do normalize. And if we are in a real estate bubble, as some suggest, rising rates and falling home prices would be a major squeeze on us all. If you couple this with the largest group at risk, Canadian retirees and the large, soon-to-be-retiree Boomer population, then a substantial portion of the Canadian population will be relying primarily on government pensions that are indexed to “not so truthful” inflation data. Those calling for the West to inflate their way out of their debt problems by creating currency might be forgetting about where that leaves those who aren’t protected.

Insurance comes in many forms: life, health, car, home, and yes, wealth. I use bullion, both gold and silver, to help insure my wealth. Hopefully I am not alone!

Yours to the penny,

Darren V. Long

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