Guild Basic Needs IndexTM
After a Few Years of Cooling, the Cost of Living is Rising Again
The official inflation rate has been running at extremely low levels for the past few years, in large part because of the collapse in energy prices from late 2014 to early 2016. The strong U.S. dollar, and corresponding decline in commodity prices, has helped keep a lid on how high consumer and wholesale prices have been able to rise. In the past few months, these trends have changed, and prices around the world are showing signs of accelerating.
Inflation has to be a key consideration for investors, businesses, consumers, and, of course, governments (who are responsible for calculating and publishing official inflation rates). As our long-term readers know, we believe the current methods of calculating the U.S. inflation rate leaves a lot of room for improvement. For instance, the most widely quoted “official” inflation index -- the Consumer Price Index (CPI) -- does not actually reflect the cost of living. It represents data on a changing basket of goods and services that comes from thousands of consumer spending surveys. In addition to basic, essential needs like food, clothing, shelter, and energy, the CPI includes many other expenditures. It includes insurance, taxes, and plenty of discretionary spending items such as personal care services, entertainment purchases, and consumer electronics, like flat-screen televisions.
Further, the calculator of the CPI, the U.S. Bureau of Labor Statistics, periodically alters the index’s contents, makes adjustments to the weighting of the components, and smooths seasonal patterns. Such tinkering with data, as we have mentioned over the years, usually results in an understatement of the inflation rate and creates an unreliable, misleading cost of living index.
Time to Revisit the GBNI
In 2012 we created the Guild Basic Needs IndexTM (GBNI) to track the costs within four categories of primary and essential living needs. Each category is assigned a specific percentage of the overall index:
While food, clothing, and shelter are self-explanatory, the energy component represents what is used by consumers in the U.S. every day for heating, electricity, cooking, and transportation.
While the prices of the underlying components can be volatile, we choose not to smooth or seasonally adjust the calculations. The categories and their values within the Guild Basic Needs IndexTM are fixed, and components are not going to be replaced.
As you can see in the above table, the prices of basic, essential needs that we track are down considerably in the past several years as commodities have fallen in U.S.-dollar terms. In spite of this, the overall U.S. consumer price basket has continued to slowly grind higher. What is interesting to us at this juncture is that the U.S. dollar looks like it may have peaked last year. If so, much of the corresponding decline in commodity prices is likely to be lapped in the coming months’ year-over-year numbers. Now, with the prices of many commodities on the rebound, one can expect an acceleration in overall prices. Accelerating prices have a profound effect on inflation expectations… and inflation expectations have a profound effect on investment markets.
Let’s not forget that central bankers in the developed world have been actively trying to stimulate prices in their countries. We are starting to see evidence of their success. The latest data from the U.S. government suggest we are entering a period of price acceleration. How high will it go? Nobody knows, but we will be monitoring the data closely going forward. Stay tuned to these letters for more.
Exclusion of Liability
website is for informational purposes only and is not intended to be a
solicitation, offering or recommendation of any security. This website
does not intend to provide investment, tax or legal advice. Guild
Investment Management does not represent that the securities, products,
or services discussed in this site are suitable or appropriate for all
investors. The site may not meet your specific needs or requirements.
Any market analysis constitutes an opinion that may not be correct. You
must make your own independent investment decisions or obtain
professional advice from your advisors before making investment
information on this site is not intended for distribution to, or use
by, any person or entity in any jurisdiction or country where such
distribution or use would be contrary to law or regulation, or which
would subject Guild Investment Management to any registration
requirement within such jurisdiction or country.
material on this site, including any opinions expressed herein, are
subject to change without notice. In addition, there are many market,
currency, economic, political, business, technological and other risks
that are beyond our control. We make reasonable efforts to provide
accurate content on the site. However, some content and some of the
assumptions, formulas, algorithms and other data that impact the content
may be inaccurate, outdated, or otherwise inappropriate. In addition,
we may have conflicts of interest with respect to any investments
mentioned on the site. Our principals and our clients may hold positions
in investments mentioned on the site or we may take positions contrary
to investments mentioned on the site.
USING THIS SITE YOU AGREE THAT GUILD INVESTMENT MANAGEMENT, INC. AND
ITS PRINCIPALS ARE NOT LIABLE FOR ANY ACTION YOU TAKE OR ANY DECISION
YOU MAKE IN RELIANCE ON ANY CONTENT. WE DO NOT GIVE INDIVIDUALIZED
INVESTMENT RECOMMENDATIONS, OR ACCOUNTING, TAX OR LEGAL ADVICE ON OR
THROUGH THE SITE.
the site includes investment related information, you should not
consider anything you find on the site to be a recommendation that you
buy, sell, hold or otherwise invest in an individual security, or any
other investment or asset.
of the content at this web site, including Guild’s current and past
market commentaries, is protected by copyright. Apart from any use
permitted under the Copyright Act, you must not copy, frame, modify,
transmit or distribute the market commentaries, without seeking the
prior consent of Guild.
may have been referred to this site by some other person or
organization or may have linked to this site from the website of another
organization. We appreciate such referrals, but are not affiliated with
any persons or organizations who may have referred us to you, and we do
not pay for any such referrals. In addition, any persons making
referrals are not responsible for Guild’s portfolio management
decisions, which are the sole responsibility of Guild.
Tel: (310) 826-8600 | Fax: (310) 826-8611 | Email: firstname.lastname@example.org
12400 Wilshire Boulevard, Suite 1080, Los Angeles, CA 90025
Copyright © 2012 Guild Investment - All Rights Reserved