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.
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