If the Consumer Price Index suggests that inflation is nothing much to worry about, should we be concerned anyway? Irwin Kellner, MarketWatch’s chief economist thinks the warning signs are there, even if we haven’t noticed them.
He suggests that most producers of goods have created the illusion that the cost of their products has remained stable. Smart shoppers are well aware of this already. Food manufacturers package less merchandise in the same size package to give the consumer the feeling that what they are buying today is the same value as it was six months ago. Retailers use a similarly nefarious method of merchandising by by listing products in the smallest common denominator such as ounces instead of price per pound or by creating an ad price that was yesterday’s regular price. But food is excluded from the inflation index.
The CPI also excludes fuel as being too volatile to measure which would give the index a lot of movement in short periods. But where the index tries to stabilize, it also masks the reality of what inflation is. Lower prices on big ticket items (because buyers are reluctant to borrow to buy) mask the higher prices on smaller items.
Mr. Kellner also points to the Treasury Inflation Protected Securities or TIPS offered to investors as a hedge against the possibility of inflation. If you were to look at this measure (compared to a similar unprotected security) you would see a much wider than normal spread in the yield. This could mean inflation is worth considering if other investors think it is so or it could mean that they are wrong, that inflation is still being controlled quite well.
He also suggests that the Federal Reserve’s balance sheet is three times the norm. Does this point to the potential that all of this money will find its way into the system, be used to buy big ticket goods and in doing so, push prices higher? Possibly but not probable in the near-term. Borrowing simply isn’t as easy as it once was.
Investing for inflation or worries about it suddenly becoming an issue is a bit premature. But, because this site is focused on retirement, should you be concerned? In your investments, no. If you are pre-paying your mortgage and you think inflation is worth considering, you can stop. There is no better inflation beater than a long-term loan like a 30-year mortgage. Take the extra cash you are not putting into pre-paying your mortgage and channel it into your investments.
To read Mr. Kellner’s article…
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