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Too Many Dollars, Too Few Dollars

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.

Charles Gave, living proof that some money managers really do "get it".

Charles Gave, living proof that some money managers really do “get it”.

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.

Walmart CPI

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.

Oooooouch!

Oooooouch!

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.

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6 thoughts on “Too Many Dollars, Too Few Dollars

  1. This does make sense but it makes my brain hurt to think about why these are closely linked. More about this would be helpful. But it does make sense that inflation comes first to some things before others. They should publish the whole basket of goods so we can see the changes over the years. Is that information available?

    • There is a lot more to say about this, but I think it boils down to something easily understood. Poor people buy only necessities, the things everyone does. These are limited commodities that are produced at the lowest possible cost, meaning that any price shock has to be passed on – there is no room for the producer to absorb it. And as physical, real items like food and energy (oil) they necessarily inflate quickly because they are more of a “gold standard” than the money itself.
      I hope that helps. I am looking for the whole basket to find out what goes into it.

  2. I am curious if this changes your support for the Fed. You have been very soft on Yellen even though her policies clearly are going to cause inflation someday. I am so not surprised that its showing up somewhere already.

    • This both does and does not change my support for Fed policies. They are doing everything they can, but no one thinks they are the right body to be doing this. It would make much, much more sense for the Federal Government to do this (and perhaps have the Fed simply buy the T-Bills needed to finance it to keep rates low). But this is a serious problem that needs to be thought through, yes. We cannot have net negative rates without encouraging more debt, which is a bad thing overall.
      There is much more to say about this – next time, I’ll hit it all. It’s hard to organize.

  3. I hate to be the one who defends the Fed here but it seems like this is an unintended consequence of what they have done. But it should be obvious that you can’t do what they have been doing without inflation and inflation does hurt everyone not just the poor. Saying that that they see inflation first isn’t a surprise either.

    • Yes, exactly. A lot of what makes this a “Managed” Depression is that the Fed and Treasury Department have been careful to not make the mistakes made in the last one. But they are, apparently, making different mistakes in the process.
      That the poor see inflation first is both surprising and not to me. Most of the inflation we’ve see has been asset inflation, which is to say stocks. The rich have gotten richer. I honestly expected luxury items to be the first to inflate for that reason. Apparently, it doesn’t work that way. That’s a bit of a problem for me, and I want to figure it out before I say more.

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