The Inflation Hoax

 |  Includes: GLD
by: Tim Ayles

What is going on out there? I was told that hyperinflation was just around the corner, right after the coming collapse in the U.S. dollar, due to supposed "money printing."

Wasn't this supposed to be the world's scariest chart, and the fuel that would send gold (NYSEARCA:GLD) to $10,000?

Why the disconnect if gold is truly a gauge on inflation? The answer, as I plan to show, is easy. Gold IS a gauge on inflation, and it is telling us something quite different than what most gold bugs believe. The truth is the United States is dealing with slowing inflation and a misunderstanding by many of what QE is actually doing. As I read articles on Seeking Alpha about this topic, without fail you will come across comments from readers who throw out anecdotal evidence as proof of the inflation that is "here" and the foundation of not believing government CPI data. I trust you have all seen or used the similar phrases such as these, as I hear them every time I comment that inflation is just not as strong as sellers of doom would like you to believe:

"You must not be buying groceries. My food costs are skyrocketing."

"Have you been to the gas station lately? How can there be no inflation when gas prices are up big?"

"Have you not seen the price of Wheat, Corn, Oil, Cotton lately? They are up XYZ% since (name the date)

Check out this one today:

"Last I checked, the items I buy most (food, fuel, rent) have all increased dramatically. I don't give a rat's behind what your "data" says, my wallet data tells me that if you believe inflation is low, then you probably also believe in unicorns. "

While all of these items are a part of the costs we incur when we spend, they are also some of the most violently moving prices in the index. I am not sure why everyone likes to jump to these items as proof that the government is lying to us about the true inflation numbers, but the rhetoric is thick anytime someone makes a claim AGAINST there being massive inflation.

What the "inflationistas" are missing invariably is the fact that these items they like to champion as proof make up only about 30% of prices for products and services consumers deal with. While these "flexible" prices will rip higher based on commodities and other factors, 70% of our prices are much more "sticky" and impact our wallets at twice the rate these anecdotal evidences do. Take a look:

Table 1. Flexible and Sticky Prices in the CPI Market Basket
Flexible-price items Frequency of adjustmenta Relative importance
Motor fuel 0.7 3.2
Car and truck rental 1.2 0.1
Fresh fruits and vegetables 1.3 0.9
Fuel oil and other fuels 1.5 0.3
Gas (piped) and electricity 1.6 4.2
Meats, poultry, fish, and eggs 1.9 1.9
Used cars and trucksb 2 1.6
Leased cars and trucksb 2 0.6
New vehicles 2 4.5
Women's and girls' apparel 2.3 1.5
Dairy and related products 2.6 0.9
Nonalcoholic beverages, beverage materials 2.7 1
Lodging away from home 3.1 2.5
Processed fruits and vegetables 3.2 0.3
Men's and boys' apparel 3.2 0.9
Cereals and bakery products 3.3 1.2
Footwear 3.4 0.7
Other food at home 3.6 2
Jewelry and watches 3.9 0.4
Motor vehicle parts and equipment 4.1 0.4
Tobacco and smoking products 4.2 0.8
Total, flexible-price items 29.8
Total, core flexible-price items 14
Sticky-price items Frequency of adjustmenta Relative importance
Infants' and toddlers' apparel 5.3 0.2
Household furnishings and operations 5.3 4.8
Motor vehicle maintenance and repair 5.8 1.2
Motor vehicle insurance 5.9 2
Medical care commodities 6.2 1.6
Personal care products 6.7 0.7
Alcoholic beverages 7.3 1.1
Recreation 7.9 5.7
Miscellaneous personal goods 8.1 0.2
Communication 8.4 3.2
Public transportation 9.4 1.1
Tenants' and household insurance 10.1 0.3
Food away from home 10.7 6.5
Rent of primary residence 11 6
OER, Northeast 11 5.3
OER, Midwest 11 4.5
OER, South 11 7.7
OER, West 11 6.9
Education 11.1 3.1
Medical care services 14 4.8
Water, sewer, trash collection services 14.3 1
Motor vehicle fees 16.4 0.5
Personal care services 23.7 0.6
Miscellaneous personal services 25.9 1.1
Total, sticky-price items 70.1
Total, core sticky-price items 63.6
Total, non-OER sticky-price items 45.7
Click to enlarge

SOURCE: a. In months.

What this data tells me is that rent (6.9%) here in the west is about 25 times more important to my wallet than processed fruits and vegetables (.3%). When the discussion comes up about inflation though, invariable we will hear about the "REAL" cost of living skyrocketing as commenter's give the price of spinach or grapes rising as proof that the government is lying to us about the true CPI numbers. I could use a comparably weak argument by stating that in my household, there are times when onions or milk increases dramatically, but compared to the $483 less I pay per month now that I just refinanced into a 2.75% mortgage, the cost of living must be going down. That $483 savings is a heck of a lot more than the extra $1.12 I might have to pay for a bag of onions.

The Federal Reserve Bank of Atlanta offers an interactive graph allowing you to see the massive variation between these two price sets. As you can see via that link, while the price of milk and gas might dramatically fluctuate at times (up to 10% increases year over year), the pace of rising prices for the majority of our costs have steadily dropped since 2008. This is most likely confusing for many who believe the government is running the printing press. Understanding what is truly going on is as easy as grasping the truth of the current monetary system in which we operate. Most mistake the way our government finances work with the way their own household operates, to their own detriment.

Another scare tactic that is often trumpeted forth by the "Gold-Only" crowd is the half-truth comment that "The U.S. dollar has lost 96% of its purchasing power over the last XYZ years." On the surface, this seems like a logical statement. Everyone knows that you could buy a candy bar 30 years ago for 5 cents, while that same candy bar today costs $1.00.

Left here, this argument seems convincing and causes the uninformed angst that can lead to anger and a desire to buy a bunker stocked with ammo. It is best though to live in a world of full truth, which brings balance and perspective one may not have had.

I like to ask a simple question to prove my point when addressing this half-truth. It goes like this:

"If you had to work for 10 minutes today to earn 1 gallon of gasoline that costs $4 per gallon, are you richer or poorer today compared with having to work for 20 minutes to earn a gallon of gas X years ago when gas cost $2 per gallon?"

You see, most who make this argument of a devalued dollar forget to mention that we are making many more dollars per hour to do the same job. Sixty minutes of labor in 2013 is the equivalent of 60 minutes of labor back in 1980. That is the constant. While the price of that candy bar has skyrocketed, the amount of dollars we get for 60 minutes of labor has also skyrocketed.

Just to prove my point, let's take a look at an ounce of Gold the last time it went through a parabolic spike in 1980. The average price of gold in 1980 was $615/oz. Back in 1980, the minimum wage was listed as $3.10 per hour. This means it would require the minimum wage laborer to exchange 198 hours of labor (before taxes) to earn that ounce of gold. Today, with gold sitting at $1292/oz. and the minimum wage at $8.00 here in California, the minimum wage worker need only exchange 161.5 hours of labor to earn that same ounce of gold. So while the price of gold is in fact up 110% during this time frame, the amount of dollars earned per hour for the minimum wage laborer has gone up FASTER than the price of gold. I realize I am cherry picking data points here, but the thrust of the point should not be missed..... just throwing out the price of goods and services without the corresponding recognition of the wage increases is ignorant at best, and deceptive at worst.

Oscar Wilde from Lady Windermere's Fan states it best:

"What is a cynic? A man who knows the price of everything and the value of nothing...."

Please, when you respond to inflation articles, don't throw out, yet again, the price of groceries as proof that inflation is here without doing the hard work of determining whether you are able to buy more or less groceries based on how many dollars per hour you are making. As in the gold example above, the cynic will "snark" at the increased price as proof inflation is here, but the balanced observer will understand that gold at $1292/oz. today is actually a better value than gold at $615/oz in 1980.

Real (not nominal) compensation per hour would argue that we are in fact keeping up much better than the doom and gloom crowd will have you believe:

Click to enlarge

Adam Smith was on to something when he wrote 237 years ago:

"The real price of every thing, what every thing really costs to the man who wants to acquire it, is the toil and trouble of acquiring it... But though labour be the real measure of the exchangeable value of all commodities, it is not that by which their value is commonly estimated... Every commodity, besides, is more frequently exchanged for, and thereby compared with, other commodities than with labour."

- Adam Smith, The Wealth of Nations, 1776

With sequestration beginning to set in broadly at American corporations, the headwind for gold will remain. In fact, the headwind is getting stronger. The sticky price set, which makes up 70% of the CPI is trending lower over the past 12 months, slowing from 1.9% annualized to 1.5%. While everyone seems to champion the fact that the government is spending less and taxes are higher (thus slowing the deficit) they do not realize that government spending = someone else's income. We are beginning to see this take place as many companies report earnings are showing a slowing or decline in revenues across all departments. Gold has been telling us for almost two years that inflation is not nearly as strong as most think. Use any short-term bounces as a spot to lighten up on overweight holdings of the metal. Yes, even with gold already down 30%+.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.