How Inflation Corrupts Everything!

For anyone who has ever worked in a Chemistry lab, or baked a cake for that matter, You know that the smallest little mistake in ingredients can ruin the entire experiment or recipe.

Add salt instead of sugar, and the cake is a disaster. But they are both white and crystalline. But their impact on whatever you bake can be dramatically different.

Inflation is like that.

It’s exactly the sort of thing that we’re currently going through in this economy. For nearly 40 years our economy has been characterized by low inflation and a steady growth economy. So much so, that the Federal Reserve, the nation’s central bank, was always devising ways to increase inflation.

Obviously, all that has changed now. I cringe when I think I’m going to have to fill the car up with gasoline. Or visit the grocery store. Or take the dog to the vet.

Common, ordinary chores, which used to be just a common everyday occurrence. Something that I could easily predict just about what it would cost me.

Today, I have no idea. I keep hitting personal records on the cost of filling up. Or the price of goods at the market.

And this uncertainty changes my behavior. In ways, I wouldn’t have thought possible just a few months ago. I’ll wait to purchase anything discretionary. That new shirt or sweater. I think I’ll wear the old one a little longer. Fix the back door. Oh, I think it can wait until I really need it.

Why, because I’m not sure when a new unexpected expense may hit me. Something out of the blue, which used to be routine, but now has become unpredictably expensive.

Like salt instead of sugar for that cake recipe inflation is everywhere, creeping into everything we do. And distorting our view of our economic world.

Let me give you three examples of ways that economists are investors who are being misled right now.

Before we begin, let me remind us, that the inflation rate as last reported hit 8 1/2%. The highest rate in 40 years. Simply put this means that just to stay even, a measure must equal or exceed that benchmark of 8 1/2%.

So far on the asset side, things are beginning to look pretty mixed. Housing prices are doing well. The Case Shiller Index, which measures price appreciation in 20 locations is up 19% on the year. Double the rate of inflation. That’s impressive.

But turning to the stock market, things aren’t looking quite so bright. The broad market is up only about 4% over the past year. Well below the inflation rate. In real terms, people are losing purchasing power by investing in equities right now.

And it’s that real measure of prices, that’s beginning to have an impact.

Two closely watched indicators are the Purchasing Managers Index. Up 15% so far this year. But after inflation, the PMI is up only half that rate. A good number, but not nearly as positive as it appears.

And then we look at Retail Sales. Every writer that I read on the latest Retail Sales number said it looks pretty good, strong even. Who are we kidding? Retail sales as last reported were up only 1/2%. That’s well below the inflation rate.

Retail sales are falling as we’ve seldom seen before. And what’s worse consumers aren’t buying retail, they’re buying inflated gas and food. The essentials just to get buy. Look for the retail sector to really suffer, when they report earnings shortly.

Finally looking at the overall economy. I’m seeing much the same kind of discussion. GDP up 6.9%, everything must be just dandy. Again this is a number that is well below the inflation rate. And yet another indication that we’re really not making progress.

So, today’s message. Don’t be fooled. A genie is loose. One that has been sleeping for 40 years. And for those of us who were around when last he appeared in the 1970s, I can tell you this genie gets into literally everything. Just like salt in a cake.