What is the rate of inflation really?

[barrett]

This is a tough question to answer but I am wondering if anyone on here has enough personal data on their expenses over the last several years to be able to calculate the impact of inflation on their own lives. I guess the question boils down to "What is your personal rate of inflation?" We don't track expenses in our family so I only have anecdotal evidence that our rate is quite high. For example, my health insurance premium went up almost 90% between 2008 and 2012. We know food prices are way up just by looking at how little $100 can buy (not very scientific, I realize). Our property taxes in CT are 'only' up 17% over six years in nominal terms but they are up by 50% relative to the sinking value of our home during that time (this according to the town's assessment and 'adjusted' mill rate).

I am not looking to spark a debate about how our government fudges the numbers as I think that is probably clear. I am more interested in whether or not the PP or any other investment allocation is really keeping pace with or beating inflation.

[dualstow]

The main increases I noticed:

Sneakers - the brand I used to get for $50 is now $100-200, but closer to 200.
My vendor of grass-fed beef.
Burglar alarm.
Health insurance.

Inflation is 2% but wow, these prices.

[Kshartle]

I am not looking to spark a debate about how our government fudges the numbers as I think that is probably clear. I am more interested in whether or not the PP or any other investment allocation is really keeping pace with or beating inflation.

I think a stock/gold portfolio rebalanced annually has been beating it since all of the money-printing kicked into high gear (since QE1).

With bond yields so low and cash earning nothing....I think the PP has been lagging a little and will probably continue to lag for years.

I consider the growth of the money supply to be the inflation rate. Even if the money supply expands and prices are flat the money-supply growth prevented falling prices so inflation still got you. The most objective measure is the Fed's publishing of M2 growth in my opinion. Obviously many disagree but I would ask them to offer something better. The CPI doesn't even attempt to measure inflation since it doesn't measure a static basket of goods.

The M2 is courtesy of the St. Louis Fed. Anyone is free to check my numbers please, I could have made a mistake.


            GLD/VTI      HBPP        M2
2009        26.5          7.9        3.1
2010        23.3          14.5        4.0     
2011        5.3          11.5        10.1
2012        11.5          6.5        8.2
2013        2.6          -2.0        4.8
2014*      4.9            5.3        3.0


* YTD

[MachineGhost]

I am not looking to spark a debate about how our government fudges the numbers as I think that is probably clear. I am more interested in whether or not the PP or any other investment allocation is really keeping pace with or beating inflation.

That's a very good question and my thought is no because it relies on the financial marketplaces to correctly assauge an rate of inflation and by default, the marketplace is majority average composed of muppet money (no disrespect to the actual Muppets!).  One reason interest rates started shooting up in the 70's was because the bondholders had sorely underestimated the rate of inflation from the Guns and Butter era fiscal spending (which was unproductive)...  and their shame in being bamboozled lasted well into the 80's and 90's with rates clearly above inflation.  So if the marketplace is in denial vs your personal experience, I'm not quite sure what the solution that to problem is.  You can't get more gain out of an asset unless other people are willing to recognize and allow it.

[MachineGhost]

I consider the growth of the money supply to be the inflation rate. Even if the money supply expands and prices are flat the money-supply growth prevented falling prices so inflation still got you. The most objective measure is the Fed's publishing of M2 growth in my opinion. Obviously many disagree but I would ask them to offer something better. The CPI doesn't even attempt to measure inflation since it doesn't measure a static basket of goods.

There's no transmission mechanism from the Fed to the real reconomy; in the past when there were actual reserve requirements for checking accounts and other types of liquid money like that, the relationship between increasing money supply and juicing the economy could have been a little more linearly evident, hence the failed Monetarist experiment of the late 70's where the Fed targeted the growth of the money supply instead of the cost of credit.  But of course, its hard to tease out expectations of reality vs actual reality...  if enough people believe in something (bigfoot, Obama is the antichrist), then perceptions become reality if they take action on it.

Anyway, what you're really looking for is not M2 but the velocity of money.  FRED publishes that.  Velocity of money reflects the intersection of M2 with actual demand or lack thereof for M2.  Inflation won't manifest unless people treat M2 like a hot potato and try to get rid of it.  M2 can and will increase as people sell off other assets and park in cash.

[Kshartle]

I consider the growth of the money supply to be the inflation rate. Even if the money supply expands and prices are flat the money-supply growth prevented falling prices so inflation still got you. The most objective measure is the Fed's publishing of M2 growth in my opinion. Obviously many disagree but I would ask them to offer something better. The CPI doesn't even attempt to measure inflation since it doesn't measure a static basket of goods.

There's no transmission mechanism from the Fed to the real reconomy; in the past when there were actual reserve requirements for checking accounts and other types of liquid money like that, the relationship between increasing money supply and juicing the economy could have been a little more linearly evident, hence the failed Monetarist experiment of the late 70's where the Fed targeted the growth of the money supply instead of the cost of credit.  But of course, its hard to tease out expectations of reality vs actual reality...  if enough people believe in something (bigfoot, Obama is the antichrist), then perceptions become reality if they take action on it.

Anyway, what you're really looking for is not M2 but the velocity of money.  FRED publishes that.  Velocity of money reflects the intersection of M2 with actual demand or lack thereof for M2.  Inflation won't manifest unless people treat M2 like a hot potato and try to get rid of it.  M2 can and will increase as people sell off other assets and park in cash.

You don't think higher stock and bond prices are the result of more money chasing them? Where is the money coming from?

[MachineGhost]

You don't think higher stock and bond prices are the result of more money chasing them? Where is the money coming from?

The money isn't coming "from" anywhere; people are bidding stocks and bonds up via gain/yield chasing behavior.  Money doesn't "flow in and out" of markets; the supply is more or less fixed as all that changes is title ownership of said assets.  For example, if you want to sell shares of a stock, you have to find someone else willing to hold those shares in exchange for giving you their cash.  It's a wash.  Nothing changes other than ownership.  The pie size remains the same.

[Kshartle]

You don't think higher stock and bond prices are the result of more money chasing them? Where is the money coming from?

The money isn't coming "from" anywhere; people are bidding stocks and bonds up via gain/yield chasing behavior.  Money doesn't "flow in and out" of markets; the supply is more or less fixed as all that changes is title ownership of said assets.  For example, if you want to sell shares of a stock, you have to find someone else willing to hold those shares in exchange for giving you their cash.  It's a wash.  Nothing changes other than ownership.  The pie size remains the same.

In order for a stock to go up in price the buyers and sellers have to meet at an ever higher higher price. Dollars change hands between buyers and sellers. When stocks are at all time highs (like now), everyone who sells now is now getting more dollars for their stocks then they paid out. Where did all this extra money come from originally that the buyers have? More money facilitates this because it is used to bid up the price.

gain/yield chasing behavior? They have to have dollars to buy stocks or they have to borrow them from someone. More dollars permits more bidding.

Do you honestly think the money supply growth doesn't affect stock prices?

[MachineGhost]

In order for a stock to go up in price the buyers and sellers have to meet at an ever higher higher price. Dollars change hands between buyers and sellers. When stocks are at all time highs (like now), everyone who sells now is now getting more dollars for their stocks then they paid out. Where did all this extra money come from originally that they buyers. More money facilitates this because it is used to bid up the price.

Well if you mean where did all the non-bank reserve money came from to pay for the higher bid prices, then it came from employers or the Treasury or even their brokers if they're stupid and borrow 2:1 on margin and pay 7%.

Do you honestly think the money supply growth doesn't affect stock prices?

Not directly.  People like you believe that the money supply growth is inflationary, so they act accordingly.  Perceptions is reality.  Even if reality is the opposite.

[Kshartle]

People like you believe that the money supply growth is inflationary, so they act accordingly.  Perceptions is reality.  Even if reality is the opposite.

Can reality be the opposite of reality? 


The median home price at one point was 25k. A loaf of bread was 10 cents. A new Corvette was $3,500. An ounce of gold was $35.

Do you think they are all up 8X-40X because the supply has been reduced or the demand is up?!?!?!?!

OMG MG.

Here's an equation for you, I'm curious what you think of it. Harry Browne (fool that he was), stuck this on page 22 of "How you can from the coming Devaluation":

Available Money Supply
Available Goods and Services

=

General Price Level


He then goes on to write: "the greater the money supply, the higher prices will be"

a little farther down: "if the money supply decreased, prices would drop"

Now if you believe those statements are false....I would ask you to please come visit central-west Florida so I can get a hit of whatever you're smoking. I won't tell anyone though 

[Kshartle]

Well if you mean where did all the non-bank reserve money came from to pay for the higher bid prices, then it came from employers or the Treasury or even their brokers if they're stupid and borrow 2:1 on margin and pay 7%.

Originally.

Where did the money money come from originally? Where is money created? It's not created by employers, they pay out of revenues.

I'll help. Money comes from the banks and the fed. They create it. When they create it, the money supply expands. When the money supply exapands, the additional money is used to bid up prices as it works it's way through the economy. Hence, more money, and everything else being equal, the general price level goes up.

[MachineGhost]

He then goes on to write: "the greater the money supply, the higher prices will be"

a little farther down: "if the money supply decreased, prices would drop"

Now if you believe those statements are false....I would ask you to please come visit central-west Florida so I can get a hit of whatever you're smoking. I won't tell anyone though 

I don't believe they are false per se, but they are incomplete, ideological and anarchronistic (Monetarism amd/or Austrianism).  The science of economics and empiricism hasn't exactly stayed in a rut since HB first pennned those statements in the early 70's. 

So essentially, you need to evolve also or you're gonna be anarchronistic too!   In other words, stop reading ideological layman economics B.S. that is decades old and read the modern literature.  The real world is far more bizarre and complex than any of the economic greats ever imagined.  Fortunately, the PP deals with all issues quite nicely so far, so long as you can handle the MaxDD when it doesn't.

[MachineGhost]

I'll help. Money comes from the banks and the fed. They create it. When they create it, the money supply expands. When the money supply exapands, the additional money is used to bid up prices as it works it's way through the economy. Hence, more money, and everything else being equal, the general price level goes up.

Sigh.  Congress creates Original Source Money.  Treasury disburses said Money out to the general economy.  If the Fed Monetizes said disbursements, it crowds out non-Fed buyers and forces them to hold relatively MORE currency instead of bonds (or instead of whatever the heck else the Fed monetized).  The Fed doesn't create any new money above what it monetized and converted into bank reserves unless it goes outside the Federal Reserve Act.  That's why monetary policy can do very little in practical terms to manage inflation either way.  The Fed is NOT the Original Source of Money.

the additional money is used to bid up prices

CAN be used.  Demand determines whether or not it IS used.  And whether or not that demand IS inflationary depends entirely on the level of productivity in the real economy.  Absolute worst case scenario: zero productivity + high rate of money creation = hyperinflation.  I'm talking about real people in the real economy here, not Wall Street which is another whole ball game because the Primary Dealers are the ones that actually monetize those bonds from the Treasury and hypothecate (leverage) them.  I will accept the argument that the Primary Dealers (in other words, Goldman Sachs and its ilk) could act as inflationistas for paper assets, but it would be conjecture not proof.

It's too bad Gumby isn't around anymore.

[moda0306]

I'll help. Money comes from the banks and the fed. They create it. When they create it, the money supply expands. When the money supply exapands, the additional money is used to bid up prices as it works it's way through the economy. Hence, more money, and everything else being equal, the general price level goes up.

Sigh.  Congress creates Original Source Money.  Treasury disburses said Money out to the general economy.  If the Fed Monetizes said disbursements, it crowds out non-Fed buyers and forces them to hold relatively MORE currency instead of bonds (or instead of whatever the heck else the Fed monetized).  The Fed doesn't create any new money above what it monetized and converted into bank reserves unless it goes outside the Federal Reserve Act.  That's why monetary policy can do very little in practical terms to manage inflation either way.  The Fed is NOT the Original Source of Money.

the additional money is used to bid up prices

CAN be used.  Demand determines whether or not it IS used.  And whether or not that demand IS inflationary depends entirely on the level of productivity in the real economy.  Absolute worst case scenario: zero productivity + high rate of money creation = hyperinflation.  I'm talking about real people in the real economy here, not Wall Street which is another whole ball game because the Primary Dealers are the ones that actually monetize those bonds from the Treasury and hypothecate (leverage) them.  I will accept the argument that the Primary Dealers (in other words, Goldman Sachs and its ilk) could act as inflationistas for paper assets, but it would be conjecture not proof.

It's too bad Gumby isn't around anymore.

Yes. Any collateral can be used to "bid up prices" in the real economy.  Like... Oh I don't know... Treasury bonds?

[Kshartle]

Anyway, what you're really looking for is not M2 but the velocity of money.  FRED publishes that.  Velocity of money reflects the intersection of M2 with actual demand or lack thereof for M2.  Inflation won't manifest unless people treat M2 like a hot potato and try to get rid of it.  M2 can and will increase as people sell off other assets and park in cash.

I just looked at the FRED Velocity of M2 Money Stock Statistics. It has gone steadily down since the late 90s from above 2.2 down to 1.54 here in 2014. Do you believe that when the velocity of money goes down, prices go up? Is it that the supply of goods and services available to purchase is only a fraction of what it was in the 90s?

Please tell me why you think the price of virtually everything in 2014 is so much higher now than in the late 90s.

Maybe it has something to with the fact that of the money supply (at least as measured by M2), being up 170% over those roughly 17 years, implying a CAGR of about 6%.


Here's an easy one. If the velocity of money doesn't change, and the money supply doubles, and the amount of goods and services available to purchase stays the same, what will happen to the general price level?

A. Increase
B. Decrease
C. Stay the same

Here's another one:

If the money supply doubles, will the velocity of money.....

A. Increase?
B. Decrease?
C. Unknown, the velocity of money depends on factors other than the growth of the money supply.

[MachineGhost]

Here's an easy one. If the velocity of money doesn't change, and the money supply doubles, and the amount of goods and services available to purchase stays the same, what will happen to the general price level?

A. Increase
B. Decrease
C. Stay the same

Here's another one:

If the money supply doubles, will the velocity of money.....

A. Increase?
B. Decrease?
C. Unknown, the velocity of money depends on factors other than the growth of the money supply.

It's C and C.

[Kshartle]

Here's an easy one. If the velocity of money doesn't change, and the money supply doubles, and the amount of goods and services available to purchase stays the same, what will happen to the general price level?

A. Increase
B. Decrease
C. Stay the same

Here's another one:

If the money supply doubles, will the velocity of money.....

A. Increase?
B. Decrease?
C. Unknown, the velocity of money depends on factors other than the growth of the money supply.

It's C and C.

If the first one is C then you are saying the money supply is not a factor in the general price level.

Well....according to FRED the velocity of money has dropped considerably in the last 17 years and yet the general price level is much higher. Why do you think that is? Do you think prices go up when the velocity of money drops?

I'd like to modify a question:

If the money supply doubles, and everything else (besides the velocity of money), is held constant will the velocity of money.....

A. Increase?
B. Decrease?
C. Unknown, the velocity of money is not affected by the growth of the money supply.

[MachineGhost]

If the first one is C then you are saying the money supply is not a factor in the general price level.

No, it's not the only factor.

Well....according to FRED the velocity of money has dropped considerably in the last 17 years and yet the general price level is much higher. Why do you think that is? Do you think prices go up when the velocity of money drops?

M2 * Velocity = Money Spent.  You'll have to look at other data to see what areas are actually inflating and what are deflating over the last 17 years.

If the money supply doubles, and everything else (besides the velocity of money), is held constant will the velocity of money.....

A. Increase?
B. Decrease?
C. Unknown, the velocity of money is not affected by the growth of the money supply.

C even though the ideological economist in me (and you) wants to say A.  If you look at Japan, its a very similar real-world outcome of your question.  They've been pushing-on-a-string for over 20 years despite innumerous money supply doublings.  If you can understand exactly what that is, then you have the answer to C.

[Kshartle]

If the first one is C then you are saying the money supply is not a factor in the general price level.

No, it's not the only factor. Yes that's why I said the velocity of money and the amount of goods and services available to purchase stays the same. I am trying isolate the supply of money as the only changing variable. If you are saying that a doubling of the money supply has no effect on price then you are saying it's not a factor.

Well....according to FRED the velocity of money has dropped considerably in the last 17 years and yet the general price level is much higher. Why do you think that is? Do you think prices go up when the velocity of money drops?

M2 * Velocity = Money Spent.  You'll have to look at other data to see what areas are actually inflating and what are deflating over the last 17 years. We are talking about the general price level not individual prices. Cell phones might be down but that is not deflation. Food is up, so is energy, education, healthcare, housing, and on and on. The general price level is much higher than 17 years ago DESPITE the velocity of money dropping significantly. Why do you think that is?

If the money supply doubles, and everything else (besides the velocity of money), is held constant will the velocity of money.....

A. Increase?
B. Decrease?
C. Unknown, the velocity of money is not affected by the growth of the money supply.

C even though the ideological economist in me (and you) wants to say A.  If you look at Japan, its a very similar real-world outcome of your question.  They've been pushing-on-a-string for over 20 years despite innumerous money supply doublings.  If you can understand exactly what that is, then you have the answer to C. An increase in the money supply and in particular, an expected increase in the money supply should cause humans to anticipate and experience devaluation of their paper money which in turn provides increased incentive to trade it more quickly for goods and services. Other factors can prevent that but if we hold those factors constand as my question did, then the correct answer is A.

MG,

From what I can gather by your answers:

1. You do not believe changes in the money supply affect the general price level.
2. You believe changes in the velocity of money changes the general price level.
3. You do not have an explanation for why the general price level is much higher than 17 years ago, in the face of a greatly reduced velocity of money.

The velocity of money ebbs and flows up and down in waves. The money supply goes up virtually every single year almost like a force of nature, and so does the general price level with only short periods of leveling off or small decreases that are quickly followed with up waves.

Price is determined by supply and demand. As the supply of something goes up, the price drops if you hold other variables constant. As the supply of dollars goes up, the price of those dollars in terms of the goods and services available for purchase drops, that is, the price of those goods and services in dollar terms rises.

Thus, while there may be a more refined way to figure out the rate of inflation, I'm content to look only at the increase in the supply of dollars. I should at least be able to purchase investment assets that rise in price very close to the rate of increase in dollars. Indeed, if I'm taking risk and deferring consumption I really need to do better than that or I've wasted purchasing power by deferring it.

A vacation to Bora Bora and Corvette today is better than one 20 years from now........

[MachineGhost]

an expected increase in the money supply should cause humans to anticipate and experience devaluation of their paper money which in turn provides increased incentive to trade it more quickly for goods and services

And that's what the velocity of money is useful for.  You can see if the actual turnover of money that human "should..." as the rest above confirms theory with reality.

1. You do not believe changes in the money supply affect the general price level.
2. You believe changes in the velocity of money changes the general price level.
3. You do not have an explanation for why the general price level is much higher than 17 years ago, in the face of a greatly reduced velocity of money.

1. Not alone.
2. No.  Velocity of money is just the turnover of money.  You have to multiply the turnover by the amount as I already showed you.  And furthermore, you have to account for all the other influences of the economy, especially productivity, to see if the end result is net inflationary.  I'm pretty sure you read all this already over a year ago when you first joined the forum.  I posted the inflation equation somewhere.
3. If there is excess spending above demand by Congress that is monetized unproductively, then it should result in the general price level increasing.  And it generally has so far.  Japan has other bottlenecks than we do.

The velocity of money ebbs and flows up and down in waves. The money supply goes up virtually every single year almost like a force of nature, and so does the general price level with only short periods of leveling off or small decreases that are quickly followed with up waves.

Correlation is not causation.  You want the causation; I'm telling you its not as simple as Friedman would have you believe.

Price is determined by supply and demand. As the supply of something goes up, the price drops if you hold other variables constant. As the supply of dollars goes up, the price of those dollars in terms of the goods and services available for purchase drops, that is, the price of those goods and services in dollar terms rises.

In the real world, variables are NOT held constant.  You can't conveniently hold them constant to prove a hypothesis and then declare that the result applies to the real world!

Thus, while there may be a more refined way to figure out the rate of inflation, I'm content to look only at the increase in the supply of dollars. I should at least be able to purchase investment assets that rise in price very close to the rate of increase in dollars. Indeed, if I'm taking risk and deferring consumption I really need to do better than that or I've wasted purchasing power by deferring it.

You're weclome to look just at the supply of dollars increasing, but it will cause you to make bad and losing investment decisions just as it has for many others for a couple of decades now.  Just search for the "inflation equation" that I posted somewhere on here and you'll find the refined answer.

[Kshartle]

In the real world, variables are NOT held constant.  You can't conveniently hold them constant to prove a hypothesis and then declare that the result applies to the real world!

They can be held constant in a question though so that you can understand the effects of changes in the isolated variable. Otherwise you have to rely on observed effects which will always contain changes in other variables you are not accounting for.