Desperately Seeking...Inflation??

“We’ve underrun our 2% inflation expectation almost since we announced it in 2012.”

- Charles Evans, Chicago Fed, 9/27/2021

Back in 1988, I designed and built a 12’ tall skateboard half-pipe in the wooded area behind our house. Every Saturday, my dad and I would go to Hechinger's to buy a load of plywood and 2 x 4’s. Plywood at the time cost about $7/sheet and the 2 x 4’s were usually under $1. What I earned delivering newspapers that week purchased enough lumber for the next week of construction. I have not shopped for lumber in a long time but I do track lumber commodity prices. Despite being aware of the spike in lumber over the past year, I was shocked to see a similar piece of plywood that I used on my half-pipe selling for nearly $80 earlier in the summer at Home Depot. Although that was partially related to supply chain issues and the price of lumber has retreated over the past several months, the price of plywood is still about 6 times what it was in 1988. I’m so old I remember when you could buy a sheet of plywood for $7.

Inflation is an interesting subject. You can write books about it, author thousands of white papers on it, give speeches on how it is "transitory" and try to explain to the viewers of CNBC how we do not have enough of it. Most of us are pretty aware of price inflation. This is assuming you actually get out of bed everyday (check out those mattress prices) and eat, drive, pay for shelter, buy health insurance, pay for college, etc, etc. We can see it everywhere. If it’s not in the prices, it’s in the size of the packaging (shrinkflation). Wait, you didn’t notice your favorite coffee now comes in an 11oz. bag instead of a 12oz. bag which used to be a 16oz. bag?? There is also another reason you still feel hungry as you walk out of your favorite restaurant grumbling over the bill. Yes, you were served less food. Was that Pale Ale really $8??

The question has to be raised, how can academics and government officials think that it is possible to calculate an accurate consumer price inflation (CPI) number for all 330 million Americans to within a decimal point in a $23 Trillion economy? The answer is they cannot. Another question is why do we need inflation at all? Some of the most prosperous times in history were in periods of zero inflation and even deflation in the late 19th century in the US and several other countries. I can think of about 29 Trillion reasons government likes inflation (A Million Here...A Trillion There...). For years, the Federal Reserve has been mystified about the apparent lack of inflation in the economy. It has been a struggle for them to reach their magical 2% target while the rest of us wonder how we just dropped $400 on barely a week's worth of groceries. Does Publix even still have BOGO's?

The struggle to reach this 2% inflation rate of course has to do with how the CPI is calculated. The calculation metrics of the CPI have been changed many times over the past few decades (when you don’t like the answer, just change the equation!). If we used the same CPI calculation that was used in 1980, inflation would be running closer to 14% as opposed to the latest report of a “transitory” 5.3% in August. There were some major changes made in 1998 that made the entire calculation even more obfuscated. Many adjustments were made regarding how things are weighted, hedonic adjustments (your new car isn’t really more expensive since it has more features than your old '95 Buick) and substitutions (if steak prices go up, it is assumed that you switched to eating chicken wings instead). In other words, even though something went up in price, utilizing their black box calculations, it didn’t.

One of the more bizarre things with the CPI calculation is the fact that home prices are not factored in at all. Home prices were removed from the calculation back in 1983, two years before Madonna and Rosanna Arquette starred in Desperately Seeking Susan. The metrics currently used in the ‘Shelter’ part of the calculation (30% of the CPI) are ‘Rent’ and something called ‘Owner’s Equivalent Rent’ (OER). Owner’s Equivalent Rent is based on a random survey of homeowners that are asked, if you were to rent your own house, what would you pay? Yup, this odd benchmark that has no correlation to house prices at all actually makes up 23% of the entire CPI calculation! The very same calculation used to guide global monetary policy [The Fed actually uses the Personal Core Inflation (PCE) measurement to set policy but it is a very similar type of calculation and is equally, if not more understated]. Is there any wonder as to why the Federal Reserve Presidents continue to desperately seek inflation?

While they are busy making speeches about “transitory” inflation and how they are worried about not having enough inflation in the near future, here are some real, unadjusted commodity price increases over the past year:

Natural Gas +121%

Heating Oil +113%

Oats +112%

WTI Crude Oil + 97%

Soybean Oil +88%

Coffee +80%

Cotton +65%

Sugar +40%

Copper +40%

Corn +37%

Wheat +22%

Lumber +20%

Case-Shiller Home Price Index +20%

Now that is some real, actual inflation that affects everyone, but instead our government officials celebrated and advertised the fact that our 4th of July cookout was a whopping 16 cents cheaper this year compared to last year. Maybe Mr. Evans is a big fan of hot dogs? In any case, with sheets of plywood running about $40, I guess I’ll hold off on building that new half-pipe.

- Eric

- Author on his half-pipe, 1988

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A Million Here...a Trillion There...Ahhh Who's Counting Anyway...

I recall when I was 7 years old that I wanted to count every page of my Webster’s New Collegiate dictionary that I had recently received. I was unsure if I had ever seen a book so thick in my life! I remember sitting down in the recliner and starting to count. I reached about 150 pages before being called in for dinner, making sure I bookmarked right where I left off. I went back to this task after dinner and reached almost 400 pages before realizing the Dukes of Hazzard was about to come on. Maybe it was because I had forgotten to bookmark my spot, but I never went back to complete this challenge.

I think back on that and wonder, why in the world did I decide to count the pages? I mean, there are page numbers so I could have just looked at the bottom of the page and checked how many it had. Was I trying to understand the concept of hundreds vs. thousands? I recently asked my daughter how many days 1 million seconds was. After thinking about it for a moment, she said 1 week. Hey, not bad! 1 million seconds is just over 11.5 days. I then asked how many days 1 billion seconds would be. Hmm, this one was a little more difficult, but she said about 1 month. Oops, good try but it's actually 31.7 years. I of course had to then follow up with the real kicker…how long is 1 trillion seconds? At this point, it became befuddling and resulted in the resigning answer of 100 years. Not even close, try 31,700 years. If you started the clock back in the Upper Paleolithic era around the time humanoids first showed up in Ireland, you would just now be getting to 1 trillion seconds.

It seems most people have a handle on what a million is. Our minds can grasp that number fairly well. Some people even have many multiples of that in their bank account. A billion gets a bit harder, although maybe not for the nearly 2,800 billionaires on the planet. Once you get into the trillions, our minds have a tough time understanding how big of a number that really is. Hey, it’s only 1000 billion…right?? The old Powers of 10 gets you every time.

In the financial industry, we deal with big numbers all the time. The terms millions and billions are tossed around like they are nothing. Even the word trillion has become a more common term within the financial lexicon (i.e. AAPL market cap of $2.4 trillion, $3.5 trillion spending bills, etc). Let’s look at some numbers and try to add some perspective by converting them to a length of time as if the numbers represented seconds:

Number of people in the USA: 330 million (10.4 years. Our seconds clock would have started in early 2011 around the time of the Japanese tsunami.)

Number of people on Earth: 7.6 billion (241 years. The seconds clock would have started in 1780, during the American Revolutionary War’s Battle of Hanging Rock.)

Number of stars in our Milky Way Galaxy: 100 billion (3170 years. The clock begins around 1150 BCE around the end of the Shang Dynasty in China.)

Jeff Bezos’ net worth: $200 Billion (6,340 years. Jeff would have had to start counting his money in 4300 BCE around the time the Egyptian calendar was started.)

Federal Reserve balance sheet: $8.4 trillion (266,000 years. Our clock starts around the time Neanderthals started roaming Eurasia. Is Jerome Powell somehow related?)

United States National Debt: $29 Trillion (920,000 years. We would have started counting next to some of the first fires used for cooking.)

That was quite the brain workout but I am sure you now have a full understanding of what a trillion is! I'm not quite sure that I am any closer to understanding the real significance of a trillion. I guess I'll go finish counting the pages of my Webster’s dictionary. Ahh, heck with it, I checked the page numbers and it’s 1532 pages long. But if I had counted them, it would have only taken me about 26 minutes.

Eric

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