| Inflation, excluding the inflation. |
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| Written by Nick Osinski | |
| Wednesday, 04 June 2008 00:29 | |
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No one will be surprised by the fact that I, along with tens of millions of others, believe that inflation is being underreported by the government; I"ve written on it countless times in this blog alone, and if we"ve ever talked economics, then I"m sure the subject came-up. It"s probably why this article really caught my attention and I"d recommend it to all of you who would like to know more on the subject. The long and short of it is a comparison of the US economy with that of a couple dozen other countries - including many of America"s trading partners. What"s surprising is that US inflation rates have been a relatively consistent 3% to 4% lower than that represented by this benchmark group. Of course, economists would argue that this differential can be explained away as a result of greater productivity in the US, but do we actually believe that the US economy is more productive than India or China, for example? Many of you know that there are two commonly-quoted inflation rates: the headline rate and the core rate, or what the author of this reference article calls the inflation, excluding inflation. Guess which one is the official rate? What you quickly notice after glancing at a graph such as the one below is that the difference between the official "core" rate and the more realistic headline rate is growing - the greater the separation between the two, the more unrealistic are the figures being reported by the government, and more importantly for us investors, the less reliable are the valuations used to compute a stock or bond price!  Anyone who"s taken a class in finance understands the importance of the inflation rate in the calculation of the price of any asset; it"s absolutely critical as a starting-point including the risk-free rate to determine a real rate of return on investment. Without an accurate measure of inflation, we have no real idea of what our real return is - i.e. what the purchasing power is of our investment upon maturity. The thing that I like most about this article is that the author doesn"t present any of this as a conspiracy theory, but rather as an alarming warning to investors - cautioning us all about keeping this discrepancy in the back of our minds when making our valuation calculations and investment decisions. Now go... read it.
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