How Not to View Current Inflation

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Thesaints
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Re: How Not to View Current Inflation

Post by Thesaints »

nedsaid wrote: Fri Jun 11, 2021 11:16 am Again, my view is that most of this uptick in inflation is transitory in nature. However, I am becoming concerned that we are getting a bit complacent. It has been about 40 years since Paul Volcker and the Fed hiked up interest rates to credit card levels and slayed the beast of sustained higher inflation that we saw starting in the late 1960's and continuing into the very early 1980's. We are so used to disinflation and falling interest rates, we can't imagine anything else. I do have my concerns here but so far the U.S. Treasury Bond Yield Curve has been very well behaved and this signals that the bond market isn't too worried. But remember, what seems unlikely is not impossible.
Yes, we can't say yet. Bonds might be stable because investors might be beginning to exit stocks. That would be in line with the yield curve steepening we are seeing.
Only time will tell and there are ways to filter out the noise, but averaging over arbitrary periods and using seasonally-adjusted data where non-adjusted data would be more appropriate is not the best way.
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iceport
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Re: How Not to View Current Inflation

Post by iceport »

Angst wrote: Fri Jun 11, 2021 10:47 am
iceport wrote: Thu Jun 10, 2021 10:20 pm
CuriousTacos wrote: Thu Jun 10, 2021 10:08 pm I agree that many news headlines exaggerate things. And I know you acknowledge that the recent trend of about 2.5% YoY is higher than the roughly 1.5% in recent years. But I think your plot deceptively makes it look like prices have merely returned to trendline of recent years. Showing a few years like the following is more complete in my opinion:

Image

What happens next is obviously unknown.
Very helpful perspective. Thanks!
Yes, 5 years adds more perspective, but I think it's still a long way from "complete". Neither is 15 years complete, but perhaps it's better than 5:

Image

I have the impression that most economists are fairly calm about the longer term prospects for inflation. As such, I am not too concerned about this either.
Hi Angst,

Actually, I didn't re-quote all of CuriousTacos' sentences above on purpose. I think it's too easy to "read into" this particular graph too much.

I'm even more convinced after following #Cruncher's link to the interactive version. Barring the quite viable possibility that my aptitude for interpreting graphs has taken a turn for the worse, I'd say there's not much of anything to be gleaned from the graph.

When I play with the sliders and select one of the worst inflation periods of my lifetime, the 1970s, what do I see? Not a helluva lot!

The gently sloping line shows a slightly steeper gentle slope in the 1970s, but nothing that would reveal the real-world conditions of that time very vividly. Maybe if I've followed the evolution of this graph for a few decades I could tell how such a subtle change in slope could so drastically affect the economy. But I haven't. So the graph just doesn't provide much insight at all, if you ask me.

In reading down this thread, I just keep thinking of those telltale sort of charts nisiprius has posted in the past comparing inflation expectations to what actually occurred (or was it interest rates? :confused ). My take-away was that it's every bit as futile to predict inflation over the next few years as it is to predict the market returns over the next few years. Yet here are all these Bogleheads trying their hand at inflation prediction, however tentative. We can't even get the direction right, let alone the magnitude!

That so many folks seem to be worried about inflation worries me.

Me? I don't know enough to know whether I should be worried about inflation...
"Discipline matters more than allocation.” ─William Bernstein
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nedsaid
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Re: How Not to View Current Inflation

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Thesaints wrote: Fri Jun 11, 2021 11:26 am
nedsaid wrote: Fri Jun 11, 2021 11:16 am Again, my view is that most of this uptick in inflation is transitory in nature. However, I am becoming concerned that we are getting a bit complacent. It has been about 40 years since Paul Volcker and the Fed hiked up interest rates to credit card levels and slayed the beast of sustained higher inflation that we saw starting in the late 1960's and continuing into the very early 1980's. We are so used to disinflation and falling interest rates, we can't imagine anything else. I do have my concerns here but so far the U.S. Treasury Bond Yield Curve has been very well behaved and this signals that the bond market isn't too worried. But remember, what seems unlikely is not impossible.
Yes, we can't say yet. Bonds might be stable because investors might be beginning to exit stocks. That would be in line with the yield curve steepening we are seeing.
Only time will tell and there are ways to filter out the noise, but averaging over arbitrary periods and using seasonally-adjusted data where non-adjusted data would be more appropriate is not the best way.
What gives me a bit of comfort is the knowledge that bond analysts are pessimistic by nature. I have joked for years that if we knew for sure that a killer asteroid would hit the earth that would wipe out all life on the planet that the bond markets would rally! Finally, we have certainty! Joke aside, I view the bond market as the canary in the mineshaft. So far, so good but I am watching.

I just checked the U.S. Treasury Yield Curve, as of yesterday June 10, 2021 the yield on the 30 year bond is now 2.15%, it started the month at 2.30%. It appears to me that inflation concerns from bond analysts are abating and that is a good sign.
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Re: How Not to View Current Inflation

Post by KlangFool »

Lee_WSP wrote: Fri Jun 11, 2021 10:47 am
KlangFool wrote: Fri Jun 11, 2021 8:05 am.

3) In any case, if your portfolio is big enough as compared to your annual expense, none of this really matters.

A) Your portfolio growth will beat the personal inflation.

B) If that is not true aka even with your portfolio size, it is still not good enough. Then, it is no longer a financial problem.

4) Ignore the noise. Be prepared instead.

KlangFool
Most of history, this plays out fine. However, hyper inflation or stagflation will make balancing the budget hard. Although, I admit, it's more of a worst case scenario rather than retirement planning.
Lee_WSP,

And, you can keep a few thousands in physical Gold/Silver as your hyperinflation insurance. Then, you are prepared even for the case of hyperinflation.

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Thesaints
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Re: How Not to View Current Inflation

Post by Thesaints »

nedsaid wrote: Fri Jun 11, 2021 11:38 am I just checked the U.S. Treasury Yield Curve, as of yesterday June 10, 2021 the yield on the 30 year bond is now 2.15%, it started the month at 2.30%. It appears to me that inflation concerns from bond analysts are abating and that is a good sign.
Or there are inflation concerns, but outflow from stocks keeps yields down.
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Re: How Not to View Current Inflation

Post by Thesaints »

KlangFool wrote: Fri Jun 11, 2021 11:39 am Lee_WSP,

And, you can keep a few thousands in physical Gold/Silver as your hyperinflation insurance. Then, you are prepared even for the case of hyperinflation.

KlangFool
How much do I have to keep if my portfolio is 3 millions ?
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Re: How Not to View Current Inflation

Post by 3CT_Paddler »

HomerJ wrote: Fri Jun 11, 2021 10:40 am
Thesaints wrote: Fri Jun 11, 2021 10:02 am
HomerJ wrote: Fri Jun 11, 2021 9:46 am It seems to be mostly caused by airlines, and used cars blip... caused by coming out of a pandemic.

Supply and demand is out of whack right now. Give it time to settle down.

Look at these numbers.

May 2020 to May 2021

All items - 5%
Food away from home - 4%
New vehicles - 3.3%
Rent of Primary residence - 1.8%
Used cars and trucks - 29.7%
Airline fares - 24.1%

Source, Bureau of Labor Statistics, Consumer Price Index
Well, "out of whack" results in higher prices. That also is "inflation". The CPI-U is an agnostic indicator; it knows nothing about the causes of price changes.
"Out of whack" comes back "into whack" after a while. Do you expect airline fares to go up 24.1% a year every year for the next 5-10 years? Do you expect used car prices to to go up 30% a year every year for the next 5-10 years?

The chip shortage is causing supply issues for new cars. Will this continue forever? As the pandemic goes away, the effects from the pandemic should go away. Chip production went way down during the pandemic, now orders have whip-sawed the other direction. As businesses adjust, supply and demand should stabilize again.
It will likely not continue for airlines and used vehicles, but what could occur is a reduction in increase in prices of vehicles, airline fees and an increase in labor costs that will start to show up comprehensively throughout the supply chain. In the same way that energy and grain prices ripple throughout supply chains. So some areas could moderate, and we still could see sustained 1970s inflation.

Transitory is a tricky thing to define for inflation. Someone here referred to a couple of years of "transitory" inflation. Is that 18 months or 3 years or ...?

People blamed OPEC for inflation in the 1970s. Are we going to come up with a similar line of justification (supply chain is out of whack due to COVID) and then find ourselves a couple of years down the road with sustained 3-7% inflation?

US Avg. Annual Inflation
1970-1972, 3-5%
1973-1975, 6-11%
1976-1978, 5-7%
1979-1981, 10-13%
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nedsaid
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Re: How Not to View Current Inflation

Post by nedsaid »

Thesaints wrote: Fri Jun 11, 2021 11:56 am
nedsaid wrote: Fri Jun 11, 2021 11:38 am I just checked the U.S. Treasury Yield Curve, as of yesterday June 10, 2021 the yield on the 30 year bond is now 2.15%, it started the month at 2.30%. It appears to me that inflation concerns from bond analysts are abating and that is a good sign.
Or there are inflation concerns, but outflow from stocks keeps yields down.
I am not aware of outflows from stocks, I haven't seen any recent articles on this topic.
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Re: How Not to View Current Inflation

Post by KlangFool »

Thesaints wrote: Fri Jun 11, 2021 11:57 am
KlangFool wrote: Fri Jun 11, 2021 11:39 am Lee_WSP,

And, you can keep a few thousands in physical Gold/Silver as your hyperinflation insurance. Then, you are prepared even for the case of hyperinflation.

KlangFool
How much do I have to keep if my portfolio is 3 millions ?
Thesaints,

If the physical Gold/Silver goes by 10X to 30X during inflation, how much do you need?


KlangFool
Last edited by KlangFool on Fri Jun 11, 2021 12:20 pm, edited 1 time in total.
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Re: How Not to View Current Inflation

Post by Angst »

iceport wrote: Fri Jun 11, 2021 11:30 am
Angst wrote: Fri Jun 11, 2021 10:47 am
iceport wrote: Thu Jun 10, 2021 10:20 pm
CuriousTacos wrote: Thu Jun 10, 2021 10:08 pm
Hi Angst,

Actually, I didn't re-quote all of CuriousTacos' sentences above on purpose. I think it's too easy to "read into" this particular graph too much.

I'm even more convinced after following #Cruncher's link to the interactive version. Barring the quite viable possibility that my aptitude for interpreting graphs has taken a turn for the worse, I'd say there's not much of anything to be gleaned from the graph.

When I play with the sliders and select one of the worst inflation periods of my lifetime, the 1970s, what do I see? Not a helluva lot!

The gently sloping line shows a slightly steeper gentle slope in the 1970s, but nothing that would reveal the real-world conditions of that time very vividly. Maybe if I've followed the evolution of this graph for a few decades I could tell how such a subtle change in slope could so drastically affect the economy. But I haven't. So the graph just doesn't provide much insight at all, if you ask me.

In reading down this thread, I just keep thinking of those telltale sort of charts nisiprius has posted in the past comparing inflation expectations to what actually occurred (or was it interest rates? :confused ). My take-away was that it's every bit as futile to predict inflation over the next few years as it is to predict the market returns over the next few years. Yet here are all these Bogleheads trying their hand at inflation prediction, however tentative. We can't even get the direction right, let alone the magnitude!

That so many folks seem to be worried about inflation worries me.

Me? I don't know enough to know whether I should be worried about inflation...
Thanks iceport for your response above. I'm sorry how I kinda put words in your mouth in the way I added back CuriousTacos' complete text - I was going to reply to his post alone in the first place but added your follow-up for more context. I'm totally with you on your response here and your last sentence above - I'm up in the air about where we're actually going and quite willing to imagine even extreme possibilities, I even find it part of the fun of investing and of participating in the forum, and life in general. :) I suspect that even a fair number of economists might also feel that they don't know enough to know whether they should be "worried about inflation" - there's plenty of uncertainty out there. The global economy continues to evolve and change but it's not so much that "this time it's different" as that it's always been different. Maybe someday the world economy will reach some kind of a predictable and manageable stasis, but none of us is going to live long enough to see that.

By the way, I subsequently edited my post to fix my graphic to correctly link to an interactive version just like #Cruncher's. The FRED site is a wonderful resource.
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Re: How Not to View Current Inflation

Post by Seasonal »

Thesaints wrote: Fri Jun 11, 2021 11:18 am
Seasonal wrote: Fri Jun 11, 2021 10:27 am I would have thought developments since the great recession would have disabused people of the quantity theory of money. The money supply went up sharply and there was lots of QE, yet inflation barely budged. The key is that velocity went down to compensate.
The key is that the QE didn't go to the families. Salaries didn't go up since 2008 (real average income went up less than 0.7% annualized). Some families did get more and you can see house prices have spiked in those areas. Corporations got all the QE and bonds and stocks and senior management compensations all also spiked.
Your prior post dealt with money supply. Presumably your concern is now fiscal policy and distribution? The first round of checks to families was from the CARES Act, signed in March 2020. That's over a year ago.

For a very large number of people, the relief checks under the CARES Act and subsequent legislation replaced income reduced due to unemployment and other economic dislocation. I find the economy recovering from covid disruptions a much more important factor in reported inflation. In any event, both relief checks and covid disruptions are temporary events, so should not lead to long-term higher inflation. The market reaction is consistent with this view.
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Re: How Not to View Current Inflation

Post by Seasonal »

Lee_WSP wrote: Fri Jun 11, 2021 10:47 amMost of history, this plays out fine. However, hyper inflation or stagflation will make balancing the budget hard. Although, I admit, it's more of a worst case scenario rather than retirement planning.
As you say, a worst case scenario. The odds of hyper inflation or stagflation appear to be very low and the evidence for an unbalanced federal budget causing problems is not very robust (the government is not a household, etc.). The market reaction is not consistent with these being likely concerns.
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Re: How Not to View Current Inflation

Post by nedsaid »

nedsaid wrote: Fri Jun 11, 2021 12:03 pm
Thesaints wrote: Fri Jun 11, 2021 11:56 am
nedsaid wrote: Fri Jun 11, 2021 11:38 am I just checked the U.S. Treasury Yield Curve, as of yesterday June 10, 2021 the yield on the 30 year bond is now 2.15%, it started the month at 2.30%. It appears to me that inflation concerns from bond analysts are abating and that is a good sign.
Or there are inflation concerns, but outflow from stocks keeps yields down.
I am not aware of outflows from stocks, I haven't seen any recent articles on this topic.
I did see this on Larry Swedroe's Twitter feed:

Larry Swedroe
@larryswedroe
·
4h
Just a thought. We had upside surprises on inflation news yet bonds rallied. Perhaps explained by not only continued Fed buying but now rebalancing demand for bonds due to large equity rally and large decline in bonds so far this year. Research shows that effect is important.
So you might be onto something here.
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Re: How Not to View Current Inflation

Post by iceport »

Angst wrote: Fri Jun 11, 2021 12:19 pm
iceport wrote: Fri Jun 11, 2021 11:30 am I don't know enough to know whether I should be worried about inflation...
Thanks iceport for your response above. I'm sorry how I kinda put words in your mouth in the way I added back CuriousTacos' complete text - I was going to reply to his post alone in the first place but added your follow-up for more context. I'm totally with you on your response here and your last sentence above - I'm up in the air about where we're actually going and quite willing to imagine even extreme possibilities, I even find it part of the fun of investing and of participating in the forum, and life in general. :) I suspect that even a fair number of economists might also feel that they don't know enough to know whether they should be "worried about inflation" - there's plenty of uncertainty out there. The global economy continues to evolve and change but it's not so much that "this time it's different" as that it's always been different. Maybe someday the world economy will reach some kind of a predictable and manageable stasis, but none of us is going to live long enough to see that.

By the way, I subsequently edited my post to fix my graphic to correctly link to an interactive version just like #Cruncher's. The FRED site is a wonderful resource.
Thank you, also, Angst. No problem at all on the quote; it was such a subtle difference as to be practically imperceptible! I just played off of it to expose and highlight my previously unstated thoughts about the plot.

And, as it turns out, you and I seem to be in complete agreement on how we view the inflation threat: interested, paying attention, maybe even wary, but not willing or able to conclude whether we're headed towards one extreme or the other, or something in between. At least that's how I see it (without intending to put words in your mouth!).

8-)

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Re: How Not to View Current Inflation

Post by 000 »

alpenglow wrote: Fri Jun 11, 2021 8:46 am What actions are you taking?
From a purely investment (not general preparedness) perspective, I am choosing to prefer cash to bonds, tilt equity allocation modestly towards foreign stocks and natural resources producers (e.g. GUNR, GDX, GDXJ), and add gold to the portfolio. Also watching the crypto space (currently have a very small allocation to BLOK).
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Re: How Not to View Current Inflation

Post by Thesaints »

Seasonal wrote: Fri Jun 11, 2021 12:37 pm
Thesaints wrote: Fri Jun 11, 2021 11:18 am
Seasonal wrote: Fri Jun 11, 2021 10:27 am I would have thought developments since the great recession would have disabused people of the quantity theory of money. The money supply went up sharply and there was lots of QE, yet inflation barely budged. The key is that velocity went down to compensate.
The key is that the QE didn't go to the families. Salaries didn't go up since 2008 (real average income went up less than 0.7% annualized). Some families did get more and you can see house prices have spiked in those areas. Corporations got all the QE and bonds and stocks and senior management compensations all also spiked.
Your prior post dealt with money supply. Presumably your concern is now fiscal policy and distribution? The first round of checks to families was from the CARES Act, signed in March 2020. That's over a year ago.
CARES Act prescribed a 300 billion direct payment to families. Maybe Biden added some on top of that. I don't keep track; I don't see a dime of it anyway.
Fed's QE has been 7.3 trillions.
Enough said.
For a very large number of people, the relief checks under the CARES Act and subsequent legislation replaced income reduced due to unemployment and other economic dislocation. I find the economy recovering from covid disruptions a much more important factor in reported inflation. In any event, both relief checks and covid disruptions are temporary events, so should not lead to long-term higher inflation. The market reaction is consistent with this view.
We can't assess yet if the supply chain has been damaged. If post-covid production can't keep up with demand we will see inflation of the "denominator" type. That's the type monetary authorities are less able to correct promptly.
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Re: How Not to View Current Inflation

Post by Robot Monster »

iceport wrote: Fri Jun 11, 2021 11:30 am In reading down this thread, I just keep thinking of those telltale sort of charts nisiprius has posted in the past comparing inflation expectations to what actually occurred (or was it interest rates? :confused ).
Don't know about what charts you mean, but he did say:

"...economic predictions, made with great confidence, that turn out to be completely wrong. One I'm fond of is Bloomberg's poll of 68 economics in April 2014 for their forecasts of the 10-year Treasury rate. 68 out of 68, 100%, unanimity, said it would rise, the only disagreement being by how much. It fell." link
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Re: How Not to View Current Inflation

Post by Blue »

Seeing a significant bump in wages, especially starting/teenage wages, in our area. Will be curious if the stickiness of wages leads to more sustained inflationary pressure after the transitory inflationary effects that we are experiencing.
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Re: How Not to View Current Inflation

Post by jackbeagle »

Are demand-based market price fluctuations part of these numbers? (Lumber, for example)
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Re: How Not to View Current Inflation

Post by Thesaints »

Prices are what they are, regardless of how they are formed, from the point of view of CPI-U calculations.

Starting teenagers salaries have spiked ? That may cause an increase in the red bull price, not so much in the case of other, more expensive items.
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Re: How Not to View Current Inflation

Post by HomerJ »

KlangFool wrote: Fri Jun 11, 2021 12:16 pm
Thesaints wrote: Fri Jun 11, 2021 11:57 am
KlangFool wrote: Fri Jun 11, 2021 11:39 am Lee_WSP,

And, you can keep a few thousands in physical Gold/Silver as your hyperinflation insurance. Then, you are prepared even for the case of hyperinflation.

KlangFool
How much do I have to keep if my portfolio is 3 millions ?
Thesaints,

If the physical Gold/Silver goes by 10X to 30X during inflation, how much do you need?


KlangFool
I think you misunderstand how gold/silver works.

It tracks inflation (sure the prices bounce around a bit).

If you have $5,000 in gold, you'll still have $5,000 in gold in real terms during inflation. Maybe $10,000 or $15,000 in real terms if people overbid gold for a while as they pile into it. If gold goes up 10x, it will be because inflation has inflated prices 8x-10x.

But if we get hyper-inflation and the $3 million loses 99% of it's value, the $5000 in gold is still only going to be able to buy $5000 worth of stuff.

Maybe the $5000 is enough to get out of the country and start over somewhere else, but it isn't enough to save your portfolio.
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Re: How Not to View Current Inflation

Post by SimpleGift »

Blue wrote: Fri Jun 11, 2021 3:39 pm Will be curious if the stickiness of wages leads to more sustained inflationary pressure after the transitory inflationary effects that we are experiencing.
My understanding is that keeping future inflation expectations in check is one of the primary reasons that the Fed has replaced its strict 2% inflation target commitment, and instead has said it will “seek to achieve inflation that averages 2% over time.” (my bold)

In other words, the Fed will allow inflation to modestly and temporarily exceed 2%, but at the same try to convince folks that it is serious about maintaining an average 2% inflation rate long term, so that expectations of future inflation will remain anchored around this level.

It will be a difficult balancing act, one for which we will all have a front row seat in the months and years ahead.
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Re: How Not to View Current Inflation

Post by nedsaid »

HomerJ wrote: Fri Jun 11, 2021 4:10 pm
KlangFool wrote: Fri Jun 11, 2021 12:16 pm
Thesaints wrote: Fri Jun 11, 2021 11:57 am
KlangFool wrote: Fri Jun 11, 2021 11:39 am Lee_WSP,

And, you can keep a few thousands in physical Gold/Silver as your hyperinflation insurance. Then, you are prepared even for the case of hyperinflation.

KlangFool
How much do I have to keep if my portfolio is 3 millions ?
Thesaints,

If the physical Gold/Silver goes by 10X to 30X during inflation, how much do you need?


KlangFool
I think you misunderstand how gold/silver works.

It tracks inflation (sure the prices bounce around a bit).

If you have $5,000 in gold, you'll still have $5,000 in gold in real terms during inflation. Maybe $10,000 or $15,000 in real terms if people overbid gold for a while as they pile into it. If gold goes up 10x, it will be because inflation has inflated prices 8x-10x.

But if we get hyper-inflation and the $3 million loses 99% of it's value, the $5000 in gold is still only going to be able to buy $5000 worth of stuff.

Maybe the $5000 is enough to get out of the country and start over somewhere else, but it isn't enough to save your portfolio.
Hey Homer, over long periods of time you are absolutely right about gold. Its real value has stayed constant but there is a lot of variability in between. What I am trying to say is that the real value of gold does fluctuate over time though it seems to revert to the mean which seems to be an ounce of gold buying the best suit in town. I don't think I can always wait 20-50 years for gold to revert to its intrinsic value. It is a commodity and it is subject to the laws of supply and demand thus it doesn't 100% move in sync with inflation rates.

I don't know about the relationship between inflation and other precious metals such as silver.
Last edited by nedsaid on Sat Jun 12, 2021 3:53 am, edited 1 time in total.
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Re: How Not to View Current Inflation

Post by eye.surgeon »

The mainstream press and most who consume it need a primer in the difference between scarcity and inflation.
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Re: How Not to View Current Inflation

Post by KlangFool »

HomerJ wrote: Fri Jun 11, 2021 4:10 pm
I think you misunderstand how gold/silver works.

It tracks inflation (sure the prices bounce around a bit).

If you have $5,000 in gold, you'll still have $5,000 in gold in real terms during inflation. Maybe $10,000 or $15,000 in real terms if people overbid gold for a while as they pile into it. If gold goes up 10x, it will be because inflation has inflated prices 8x-10x.

But if we get hyper-inflation and the $3 million loses 99% of it's value, the $5000 in gold is still only going to be able to buy $5000 worth of stuff.

Maybe the $5000 is enough to get out of the country and start over somewhere else, but it isn't enough to save your portfolio.
HomerJ,

1) The basic definition of hyperinflation is at least 50% inflation per month.

<<But if we get hyper-inflation and the $3 million loses 99% of it's value, the $5000 in gold is still only going to be able to buy $5000 worth of stuff.>>

https://en.wikipedia.org/wiki/Hyperinfl ... _Republic)
https://theconversation.com/whats-the-g ... tal-150340

2) Why should that be true? The USD may lose 99% of its value. But, the Gold price as per USD may go up 100X or a lot more. Please note that at that time (Weimar Republic), the USD was in the Gold standard.

3) In fact, historically, in every case, the gold price went up a lot more.

KlangFool
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Re: How Not to View Current Inflation

Post by Thesaints »

eye.surgeon wrote: Fri Jun 11, 2021 4:20 pm The mainstream press and most who consume it need a primer in the difference between scarcity and inflation. Scarcity is what is driving auto prices, construction materials, etc. This is widely being reported as inflation. It is not. Inflation is when there are 100 loaves of bread on the shelf and they all cost double what they did a year ago. Scarcity is when there is 1 loaf of bread on the shelf and it costs double what it did when there was 100. The majority of the prices increases we have seen in 2021 have been scarcity-driven.
Inflation is an increase in the ratio of "quantity of money normally available to be exchanged against goods/service" and "quantity of good/services normally available to be exchanged".
Inflation can happen because the quantity of available money increases more rapidly than the quantity of available goods/service, or if the quantity of goods/service available to be exchanged decreases more rapidly than the quantity of money.

There was inflation in besieged Candia, when sewer rats went for 20 zecchini each, and there was inflation in the USA in 1981 (10% yoy) when there was really no scarcity of goods.
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Re: How Not to View Current Inflation

Post by Blue »

Thesaints wrote: Fri Jun 11, 2021 4:00 pm
Starting teenagers salaries have spiked ? That may cause an increase in the red bull price, not so much in the case of other, more expensive items.
From this vantage point, it looks like a slippery slope going from starting salaries for entry positions to the next few levels up. It’s hard to imagine a world where it doesn’t influence the higher wage positions.
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Re: How Not to View Current Inflation

Post by Dale_G »

KlangFool wrote: Fri Jun 11, 2021 8:43 am
deepvalleys wrote: Fri Jun 11, 2021 8:11 am 3.0% is still a lot. But stocks should in theory keep up with inflation, right?
deepvalleys,

Why should that matters to you if your portfolio is several times your annual expense?

Let's assume that the annual expense = 100K and your portfolio is 300K. Let's assume that the inflation is 3% and your portfolio grow 2%.

The annual expense grow to 103K but your portfolio grow to 306K.

KlangFool
So the portfolio grew to 306K - great. Unfortunately the buying power is 3% less = 296.8K. And even in the unlikely case that inflation is zero the next year, the expenses will still be 103K.

For folks with those 1 million dollar portfolios, it isn't that a box of Cheerios costs another 15 cents. 3% inflation just wiped out $30,000 of future buying power.

My small pension only buys 60% as much bread as when I retired. Three more years of "modest" 3% inflation will mean only 50% as much bread. I suppose I could switch to cake. :twisted:

Dale
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Re: How Not to View Current Inflation

Post by KlangFool »

Dale_G wrote: Sat Jun 12, 2021 6:05 pm
KlangFool wrote: Fri Jun 11, 2021 8:43 am
deepvalleys wrote: Fri Jun 11, 2021 8:11 am 3.0% is still a lot. But stocks should in theory keep up with inflation, right?
deepvalleys,

Why should that matters to you if your portfolio is several times your annual expense?

Let's assume that the annual expense = 100K and your portfolio is 300K. Let's assume that the inflation is 3% and your portfolio grow 2%.

The annual expense grow to 103K but your portfolio grow to 306K.

KlangFool
So the portfolio grew to 306K - great. Unfortunately the buying power is 3% less = 296.8K. And even in the unlikely case that inflation is zero the next year, the expenses will still be 103K.

For folks with those 1 million dollar portfolios, it isn't that a box of Cheerios costs another 15 cents. 3% inflation just wiped out $30,000 of future buying power.

My small pension only buys 60% as much bread as when I retired. Three more years of "modest" 3% inflation will mean only 50% as much bread. I suppose I could switch to cake. :twisted:

Dale
Dale_G,

My portfolio is at 28X not counting the social security. It is at 56X with the social security. It won't matter to me.

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TheDDC
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Re: How Not to View Current Inflation

Post by TheDDC »

Dale_G wrote: Sat Jun 12, 2021 6:05 pm
KlangFool wrote: Fri Jun 11, 2021 8:43 am
deepvalleys wrote: Fri Jun 11, 2021 8:11 am 3.0% is still a lot. But stocks should in theory keep up with inflation, right?
deepvalleys,

Why should that matters to you if your portfolio is several times your annual expense?

Let's assume that the annual expense = 100K and your portfolio is 300K. Let's assume that the inflation is 3% and your portfolio grow 2%.

The annual expense grow to 103K but your portfolio grow to 306K.

KlangFool
So the portfolio grew to 306K - great. Unfortunately the buying power is 3% less = 296.8K. And even in the unlikely case that inflation is zero the next year, the expenses will still be 103K.

For folks with those 1 million dollar portfolios, it isn't that a box of Cheerios costs another 15 cents. 3% inflation just wiped out $30,000 of future buying power.

My small pension only buys 60% as much bread as when I retired. Three more years of "modest" 3% inflation will mean only 50% as much bread. I suppose I could switch to cake. :twisted:

Dale
All the more reason to dump the 60/40 retirement fund model for 100/0 for as long as possible during the accumulation years.

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Re: How Not to View Current Inflation

Post by Northern Flicker »

It appears this analysis can be made more fine-grained. This week's CPI report has some interesting features. As noted in the graph posted here:

https://mobile.twitter.com/TheStalwart/ ... 5218978816

The year-over-year change in CPI for transportation was about 3.8%. For everything else, it was about 2.54%.

So transportation costs today are being compared to their very depressed levels a year ago. The remaining basket of goods has not inflated as much, and may mostly just be passing shipping costs through to consumers.
My postings are my opinion, and never should be construed as a recommendation to buy, sell, or hold any particular investment.
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Re: How Not to View Current Inflation

Post by Thesaints »

Northern Flicker wrote: Mon Jun 14, 2021 3:56 pm It appears this analysis can be made more fine-grained. This week's CPI report has some interesting features. As noted in the graph posted here:

https://mobile.twitter.com/TheStalwart/ ... 5218978816

The year-over-year change in CPI for transportation was about 3.8%. For everything else, it was about 2.54%.

So transportation costs today are being compared to their very depressed levels a year ago. The remaining basket of goods has not inflated as much, and may mostly just be passing shipping costs through to consumers.
Looks like "number of categories that have increased more than 2% yoy" is actually a contrarian indicator if inflation. :)
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Re: How Not to View Current Inflation

Post by Whakamole »

Thesaints wrote: Fri Jun 11, 2021 4:00 pm Prices are what they are, regardless of how they are formed, from the point of view of CPI-U calculations.

Starting teenagers salaries have spiked ? That may cause an increase in the red bull price, not so much in the case of other, more expensive items.
Teenagers also play video games, which require chips; chips are also used by automobiles (note the prices there), which means not just a price increase in cars but indirectly in things that use cars - think supply chains at some point. It also impacts the price of computers in general, such as the ones in data centers (the "cloud") used by many companies.

Teenagers just don't drink red bull.
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Re: How Not to View Current Inflation

Post by jdamo »

+! nedsaid

Now to everyone, how will VBTLX (Vanguard total bond index fund) react to this recent inflation spike? We have 60% invested in VBTLX in our portfolio.
I was advised that it was the most diversified bond fund on the planet. Will it suffer a lot or will it be ok when it buys new bonds(at higher coupon if inflation continues) as old bonds mature?

Given uncertainty about VBTLX, I debate selling part of it and buying investment grade corporate bond index fund (VFICX). Is this a good idea?
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Re: How Not to View Current Inflation

Post by 3CT_Paddler »

To those who say inflation is mostly a factor of supply chain disruption and has little to do with monetary policy, how do you explain the fact that the EU inflation rate is running much lower than the US?
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Re: How Not to View Current Inflation

Post by phantom0308 »

TimTheEnchanter wrote: Thu Jun 10, 2021 10:22 pm Basic logic implies that when the money supply gets to this level inflation is unavoidable. The fed is between the rock and the hard place. The fed keeps buying AAA apple paper etc, just to pump money but when it stops and eventually it will have to, watch out...current rates are artificially low because of the fed's action.
The money supply has been at a high level for over a decade. Inflation isn’t inevitable. It’s only inevitable if everyone acts like it is.
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Re: How Not to View Current Inflation

Post by phantom0308 »

3CT_Paddler wrote: Thu Jul 15, 2021 10:10 pm To those who say inflation is mostly a factor of supply chain disruption and has little to do with monetary policy, how do you explain the fact that the EU inflation rate is running much lower than the US?
Europe was initially slower to vaccinate (they recently overtook the US) so they were slower to reopen. Inflation has been rising as demand picks up faster than supply. Supply had no issue keeping up with demand prior to the pandemic so I expect they’ll figure it out soon.
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Re: How Not to View Current Inflation

Post by phantom0308 »

jdamo wrote: Thu Jul 15, 2021 9:19 pm +! nedsaid

Now to everyone, how will VBTLX (Vanguard total bond index fund) react to this recent inflation spike? We have 60% invested in VBTLX in our portfolio.
I was advised that it was the most diversified bond fund on the planet. Will it suffer a lot or will it be ok when it buys new bonds(at higher coupon if inflation continues) as old bonds mature?

Given uncertainty about VBTLX, I debate selling part of it and buying investment grade corporate bond index fund (VFICX). Is this a good idea?
Panicking and changing your asset allocation based on a few months of data as we come out of the worst pandemic in a century seems like a bad idea. If bonds were such a bad investment then their price would have already dropped. Everything you’re worried about is known and priced into the market.

The simple three fund model that includes a large chunk of bonds is recommended based on historical US data. This includes periods of much worse inflation than this.
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Re: How Not to View Current Inflation

Post by 3CT_Paddler »

phantom0308 wrote: Fri Jul 16, 2021 2:15 am
3CT_Paddler wrote: Thu Jul 15, 2021 10:10 pm To those who say inflation is mostly a factor of supply chain disruption and has little to do with monetary policy, how do you explain the fact that the EU inflation rate is running much lower than the US?
Europe was initially slower to vaccinate (they recently overtook the US) so they were slower to reopen. Inflation has been rising as demand picks up faster than supply. Supply had no issue keeping up with demand prior to the pandemic so I expect they’ll figure it out soon.
That could be part of it for sure, but if you look at the UK they were actually ahead of the US as far as vaccinations and seem to be on par as far as level of opening since the spring. Their inflation rate is still a good bit below our current inflation rate.
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Re: How Not to View Current Inflation

Post by Whakamole »

phantom0308 wrote: Fri Jul 16, 2021 2:22 am
jdamo wrote: Thu Jul 15, 2021 9:19 pm +! nedsaid

Now to everyone, how will VBTLX (Vanguard total bond index fund) react to this recent inflation spike? We have 60% invested in VBTLX in our portfolio.
I was advised that it was the most diversified bond fund on the planet. Will it suffer a lot or will it be ok when it buys new bonds(at higher coupon if inflation continues) as old bonds mature?

Given uncertainty about VBTLX, I debate selling part of it and buying investment grade corporate bond index fund (VFICX). Is this a good idea?
Panicking and changing your asset allocation based on a few months of data as we come out of the worst pandemic in a century seems like a bad idea. If bonds were such a bad investment then their price would have already dropped. Everything you’re worried about is known and priced into the market.

The simple three fund model that includes a large chunk of bonds is recommended based on historical US data. This includes periods of much worse inflation than this.
Would we have been better with TIPS (more stability, better SWR, etc.)? I know we didn't have them back then, but I've heard of "synthetic TIPS" used for modeling.
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Re: How Not to View Current Inflation

Post by ljb »

3CT_Paddler wrote: Fri Jul 16, 2021 7:59 am
phantom0308 wrote: Fri Jul 16, 2021 2:15 am
3CT_Paddler wrote: Thu Jul 15, 2021 10:10 pm To those who say inflation is mostly a factor of supply chain disruption and has little to do with monetary policy, how do you explain the fact that the EU inflation rate is running much lower than the US?
Europe was initially slower to vaccinate (they recently overtook the US) so they were slower to reopen. Inflation has been rising as demand picks up faster than supply. Supply had no issue keeping up with demand prior to the pandemic so I expect they’ll figure it out soon.
That could be part of it for sure, but if you look at the UK they were actually ahead of the US as far as vaccinations and seem to be on par as far as level of opening since the spring. Their inflation rate is still a good bit below our current inflation rate.
EU inflation rate has been at or below US for quite some time. This is not new since COVID. EU population is considerably older than US, and birth rates are lower, two factors believed to be a strong downward drag on inflation.

On a tangential note, US birth rate went down 4% in 2020. That seems to me to have huge implications for the economy long term. Nothing is a demand for goods and services like a child!
Each birth stimulates spending by parents, grandparents, extended family and friends, and every level of government, for decades to follow. Some of the babies not born in 2020 due to COVID will be born later by parents who hesitated due to the pandemic and are feeling more economically confident now, but Brookings Institute doesn't think it will be many:

https://www.brookings.edu/blog/up-front ... bably-not/
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Re: How Not to View Current Inflation

Post by Thesaints »

That amounts to about 150,000 "missing people" in the future. Nothing that a tweak to immigration policies can't fix.
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Re: How Not to View Current Inflation

Post by Maverick3320 »

HomerJ wrote: Fri Jun 11, 2021 10:40 am
Thesaints wrote: Fri Jun 11, 2021 10:02 am
HomerJ wrote: Fri Jun 11, 2021 9:46 am It seems to be mostly caused by airlines, and used cars blip... caused by coming out of a pandemic.

Supply and demand is out of whack right now. Give it time to settle down.

Look at these numbers.

May 2020 to May 2021

All items - 5%
Food away from home - 4%
New vehicles - 3.3%
Rent of Primary residence - 1.8%
Used cars and trucks - 29.7%
Airline fares - 24.1%

Source, Bureau of Labor Statistics, Consumer Price Index
Well, "out of whack" results in higher prices. That also is "inflation". The CPI-U is an agnostic indicator; it knows nothing about the causes of price changes.
"Out of whack" comes back "into whack" after a while. Do you expect airline fares to go up 24.1% a year every year for the next 5-10 years? Do you expect used car prices to to go up 30% a year every year for the next 5-10 years?

The chip shortage is causing supply issues for new cars. Will this continue forever? As the pandemic goes away, the effects from the pandemic should go away. Chip production went way down during the pandemic, now orders have whip-sawed the other direction. As businesses adjust, supply and demand should stabilize again.
The problem with the chip shortage is that there is no short-term solution. It takes ten years to build a new chip fab/plant.
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Re: How Not to View Current Inflation

Post by jdamo »

phantom0308 wrote: Fri Jul 16, 2021 2:22 am
jdamo wrote: Thu Jul 15, 2021 9:19 pm +! nedsaid

Now to everyone, how will VBTLX (Vanguard total bond index fund) react to this recent inflation spike? We have 60% invested in VBTLX in our portfolio.
I was advised that it was the most diversified bond fund on the planet. Will it suffer a lot or will it be ok when it buys new bonds(at higher coupon if inflation continues) as old bonds mature?

Given uncertainty about VBTLX, I debate selling part of it and buying investment grade corporate bond index fund (VFICX). Is this a good idea?
Panicking and changing your asset allocation based on a few months of data as we come out of the worst pandemic in a century seems like a bad idea. If bonds were such a bad investment then their price would have already dropped. Everything you’re worried about is known and priced into the market.

The simple three fund model that includes a large chunk of bonds is recommended based on historical US data. This includes periods of much worse inflation than this.
jdamo
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Re: How Not to View Current Inflation

Post by jdamo »

Thanks and I am trying to be long term ....not swayed by recent data...it's hard sometime since this has been a dramatic year+!
Atilla
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Re: How Not to View Current Inflation

Post by Atilla »

The powers that be will always say a spike in inflation is "transitory".

Look at necessities - food, gas, housing - medium to lower income folk have no choice but to purchase or rent. Inflation for them is real. And it likely won't be a "transitory" blip. It's real and it's a financial killer.

I don't think I'm wrong on this - feel free to bring this post up a year from now... :(
Seasonal
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Re: How Not to View Current Inflation

Post by Seasonal »

Blue wrote: Fri Jun 11, 2021 3:39 pm Seeing a significant bump in wages, especially starting/teenage wages, in our area. Will be curious if the stickiness of wages leads to more sustained inflationary pressure after the transitory inflationary effects that we are experiencing.
An oft overlooked fact is that the extra amounts paid due to inflation are received somewhere, most typically by businesses. The businesses pay those extra amounts as wages or distributions to owners (or to other businesses, which just repeats the cycle, or retain the amounts, which increases the businesses' value).
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