Let’s get fundamental for a minute.
Monetary inflation is an expansion in the money supply. That makes sense. Whatever expands can be said to “inflate”.
Over time, the more popular inflation definition seems to have morphed into inflation’s result. That is, price inflation, a.k.a. the dollar’s diminished purchasing power.
Therefore, a better name for today’s “inflation” could actually be “deflation” because your greenback’s purchasing power deflates.
The stock market is forward-looking. They fear that high inflation could lead to higher interest rates, cooling the economy. Low Demand = Low Inflation. Consumer demand increases as companies are hiring and people are out spending.
Of course, as real estate investors, we’re in prime position to benefit from inflation with long-term fixed interest rate debt tied to cash flowing assets.
The term that I coined, the Inflation Triple Crown, means that we win from:
- Price inflation
- Debt debasement
- Cash flow enhancement
Here’s the video, “How To Win The Inflation Triple Crown”. Watch here or click below:
Tracking inflation is complicated and difficult due to the changing quality, quantity, and size of a basket of goods and services. Inflation is usually reported in year-over-year fashion.
When a chocolate bar manufacturer keeps prices steady, yet reduces the size of their bar from 1.8 oz. to 1.5 oz., it is called shrinkflation.
Is the Big Mac the same size and price … but yet they substituted more processed ingredients?
You and your spouse even pay different rates of inflation. Beef price inflation doesn’t affect vegans. Gas price spikes affect long-haul truckers more than stay-at-home computer programmers.
Computers have many more features than they did fifteen years ago.
What if the next iPhone is faster than the current one, yet they cost the same? Are consumers entitled to this progress? This is called a hedonic adjustment – a change in innovation.
What if a car costs the same as it did last year, but lower interest rates this year reduce your payment?
Then there are one-off shocks that introduce aberrations, like a price spike in commodities or certain manufacturing sectors, such as lumber, copper, semiconductor chips, or used cars.
Then what about how tax changes affect your consumer expenditures?
These are some reasons why there is no singular great measure of inflation out there. Here are four:
CPI is the Consumer Price Index. It measures the price change paid by urban consumers for a basket of goods and services. But it excludes investment assets like real estate and stocks, and many food and energy components. The media most often reports CPI.
Core PCE means Personal Consumption Expenditures. It’s similar to the CPI. Core PCE is chiefly what the Fed uses for monetary policy decisions.
PPI is the Producer Price Index. It tracks how much it costs producers to make things. The PPI is interesting! Because items are produced before consumers pay for things, it can be a bellwether of higher consumer prices in the future. High PPI could indicate higher future inflation.
Shadow Stats “reduces the government’s inflation-reducing gimmicks”. I’ve talked to the founder of this wonky and dated-looking site before, John Williams. Many economists respect his methodology. It shows that inflation is far higher than the three government-reported measures: CPI, Core PCE, and PPI.
Remember, inflation erodes your equity value and your debt at the same rate. More debt in your portfolio means more inflation-profiting benefit.
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