What is the real rate of inflation? The official Consumer Price Index (CPI) is calculated with a basket of goods that are supposed to reflect the economy as a whole. There are over 200 categories of consumer goods that make their way into the CPI, including health care, airline travel, clothes, education, and so on. The price of this basket of goods is checked from one month to the next and it’s all added up to produce the CPI.
There is one big problem with this, however – not everyone buys the same goods. On average, over the whole economy, it’s about right. But people who have very little money don’t fly, go to the doctor as often, pay for school, and so on. Charles Gave of GaveKal Dragonomics came up with his own measure of inflation, modeled for the poor, and found some surprising results – and a correlation that spells trouble for the nation’s poor for a long time to come.
The measure that Gave developed is inelegantly named the “WalMart CPI”. It’s designed to measure a real CPI for people at the lowest end of the economic spectrum, which is to say those who shop at the discount store. His best guess? That 50% of their income goes to rent, 30% to food, and 20% to energy. It’s about right, based on my experience. Forget about airplanes and doctors, this this the core inflation for the poor.
The chart below shows the ratio of this “WarMart CPI” to the official overall CPI. You can see that it’s well above 1.0 since about 1980 and growing rather rapidly through the 2000s. It may have stabilized today, but at a high rate. That means that prices are rising faster for people who are barely getting by than they are for the population as a whole. But there’s another surprise in the chart as shown.
The pink areas are periods when interest rates are effectively negative – that is, that big banks and wealthy people can borrow at rates lower than inflation. These are the times when those with access to capital have every reason to borrow as much as they can, but more to the point there is upward pressure on inflation. The US Dollar effectively becomes worth less money when it’s easier to get.
But what we see by comparing the WarMart CPI to the regular CPI is that net negative rates push this inflation to those who are scrambling to survive. The stuff they buy is all very physical and real and apparently responds more quickly to “inflation” or the growing excess of US Dollars that comes about from a loose monetary policy.
This is troubling for many reasons. The most important is that everyone believes that demographic pressures will put a lid on both inflation and interest rates for a long time to come, meaning the regime of net negative interest rates that we have been living under more or less continuously since 2000 is likely to continue. That puts even more pressure on the poor.
But the real problem is that until now, no one has bothered to measure this. Gave has produced an effective measure that tells us something is wrong, but how long will it take before this is accepted and understood? We can’t fix something until we all agree on how to measure success – and this problem has been ignored for a very long time without charts like this to show it.
Why is an investment economist like Gave concerned with the poor? Because he sees an economy that is effectively melting down and incapable of understanding the erosion of the middle class consumer lifestyle that propelled decades of economic success. This was presented in a piece called “Poverty Matters for Capitalists” that makes the argument that the erosion of disposable income for so many working people is at the heart of today’s depression – and current policy isn’t going to help it get better any time soon, at least not with net negative rates.
So what’s the one good thing we can take from this? There is a growing realization that a healthy economy for everyone is, indeed, a the only healthy economy for everyone. And at least someone has found a way to measure and demonstrate why the working poor in America aren’t getting ahead. It’s a good start to fixing the problem, assuming we have the right level of alarm over this situation.