Quantifying Inflation's Toll

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 |  Includes: DIA, GLD, QQQ, SPY
by: Hard Assets Investor

By Brad Zigler

Hard Assets Investor keeps track of the Breakfast Index (see "Inflation: Tears In Your Coffee") as a counterpoint to the official CPI/PPI figures.

Inflation, measured by either the government's methods or by our own homegrown metrics, boils down to the loss of purchasing power. If your George Washingtons buy you less food or petrol now than they did a year ago, that's evidence of inflation.

The government plays a much bigger role in the inflation drama that that of a mere reporter. As it sets monetary and fiscal policy, the government is, in fact, an agent of inflation. The effect of these policies is best seen through the lens of the currency market. Compare the cost of gold - a traditional store of value - in greenbacks with its euro value over the past eight years and you'll see how inflation's chipped away at U.S. purchasing power by an annual average of 17.2%:

Gold Spot Prices

 

Date

 

Euro Price

 

Dollar Price

Change In Dollar

Purchasing Power

01-Jan-00

286.99

289.00

 

01-Jan-01

290.14

273.20

6.6%

01-Jan-02

312.77

278.80

5.8%

01-Jan-03

331.77

348.30

-18.9%

01-Jan-04

331.19

416.50

-19.8%

01-Jan-05

323.50

438.80

-7.7%

01-Jan-06

436.47

516.76

17.2%

01-Jan-07

482.84

637.00

-12.6%

01-Jan-08

567.28

883.87

-21.3%

Average

 

 

-6.3%

Click to enlarge

No more striking example of inflation can be found than that seen in the oil market. Congress has been looking to pin the blame for spiraling oil prices on speculators in the NYMEX trading rings and in the ICE cybermarket, but has paid scant attention to looking for perpetrators on the National Mall.

In past 25 months, West Texas Intermediate crude's soared from $70 to $125 a barrel. If we again use the euro as our benchmark, we can trace $45 of that price hike to currency erosion alone.

Crude Oil Price (U.S. Dollar Vs. Euro)

 Crude Oil Price (Dollar vs Euro)

Oil's price has, indeed, shot up over the past couple of years. But matters have been made worse by a policy of talking up a strong dollar while knocking the chair out from under it.