What is the real inflation rate? Problems with the CPI

You’ve probably seen the pictures of people using wheelbarrows full of cash to buy a loaf of bread in Weimar Germany. But that could never happen to us, right? Hyperinflation is just a distant nightmare from the pass, and something that happens sometimes in third world countries. Right?

Inflation is Everybody’s Problem

It’s true that hyperinflation has not hit wealthy countries like the United States in the modern era, but lower rates of inflation can do a lot of damage too. Of course, central banks are supposed to keep inflation at a moderate rate of around 2%.

This means that if you keep cash under your mattress, you will lose 2% of the value of your savings per year. Keeping your cash in a savings account hasn’t been enough to avoid that over the last few years– even CD’s have typically yielded less than 2% over the last decade.

Well, that means that keeping your savings in cash is kind of like sitting on a melting ice cube. So people were told to put their money in a retirement fund and get higher returns. Retirement accounts usually average 3-8% per year, which means that you can beat inflation!

Not so fast. That was the case until COVID came along.

The “experts” said that creating trillions of dollars out of nothing would not increase inflation.  But lo and behold, after a few trillion dollars were created from nothing, the inflation rate soon went up. As of mid-2022, it reached 8.3%, meaning that most high performing retirement accounts will barely be able to keep up with inflation. Lower performing accounts will just slow the rate at which your money loses value.

But Wait, it Gets Worse! The Real Inflation Rate

This might seem like bad news, but if we take a deeper look at how  inflation is calculated, it gets worse. Some economists believe that the official measurement of inflation, known as the Consumer Price Index (CPI), is designed to hide true inflation levels. The CPI tracks increases in the price of basic expenses like rent, food, utilities, fuel, and education.

What is more important, though, is what the CPI doesn’t track. Real estate prices are not included. But why does that matter?

First of all, it means the CPI uses rent rather than home prices to track inflation. Landlords usually don’t raise rent immediately when the value of their properties go up, because their expenses don’t go up. The rental market is more influenced by what renters can pay than the value of properties that landlords already own.

Even if people are struggling to pay rent, landlords will lower prices until they find renters. This could happen even while home prices are skyrocketing, making it difficult for most people to afford a home. The CPI included home prices until 1983, when it switched over to rent.

Let’s look at the same chart from above, looking at when the new method of calculation was adopted.

According to the old method of calculating the CPI, the inflation rate in the US would currently be closer to 15% instead of 8%.

Of course, economist debate all of this. But what can’t be denied is that everyone is feeling the effects of rising prices.

This may be because there are other ways that the CPI could hide inflation.

More Problems with the CPI

Another criticism of the CPI is that it doesn’t measure reduction in quality. For example, when Snickers gets hit by inflation, they might not want to raise their prices, because they know people won’t buy as many candy bars. Instead, they might reduce the number of peanuts in their candy bars.

The result is that everyone gets a lower quality product. In this way, people silently pay the price of inflation.

The government has good reasons to underestimate the real cost of inflation. The CPI is used to calculate cost-of-living adjustments for social services and benefits programs. That means that calculating a lower inflation rate equals more money in the pockets of the government.

Furthermore, the CPI doesn’t include the stock market. A large amount of the money created by central banks ends up invested in the stock market. By some estimates, 46% of stimulus checks were invested in the stock market.

This money doesn’t immediately raise prices, but it does increase share prices. The money that goes toward increases share prices will eventually hit the economy when corporations or employees sell off shares.

One of the reasons that companies or employees sell shares is to cover expenses in hard times. That means that when an economic crisis hits, tons of unrealized inflation can be unleashed on the economy.

Escaping the Inflation Trap

There is no agreement on whether the CPI is an accurate measure of inflation, but everyone agrees that the situation is bad. There’s also no question that salaries are not keeping up with inflation, so everything is getting more expensive. As these problems accelerate, many people are starting to lose confidence in government currencies.

These economic problems can quickly turn into political problems, which will put more pressure on government currencies. This could turn into an inflationary “death spiral.” As confidence in government currencies declines, more and more people will rush to escape from them, further increasing inflation.

Historically, all fiat currencies have eventually collapsed. The sooner you are able to get out, the better.

The Upside of Crisis

Precious metals have always provided a form of security against financial crises. There are two major potential upsides to investing in silver.

First is governments returning to gold and silver reserves. In the past, governments around the world purchased precious metals to hold in reserve. A return to this practice would drive huge growth in the demand for silver, potentially causing prices to shoot up.

Second, consumers seeking stability can also drive up prices. As more and more people move their money to silver to escape inflation, the trickle could turn into a flood by way of a “stampede effect.”

The global economic outlook may seem scary these days, but it’s important to remember that every cloud has a silver lining. Moving early to protect your wealth by investing in silver could help you stay ahead of the pack. It may be possible to actually grow your wealth through any potential crisis.

With SilverToken, it has never been easier to invest in and own real silver. Furthermore, SilverToken vaults are highly resistant to bad government policies, since they are distributed around the world in 8 different stable and politically neutral countries.

This means that even if the government starts seizing precious metals (as happened in the US in 1933), the silver that SilverTokens represent will still be safe. SilverTokens are a versatile and convenient investment that has the potential to be highly profitable, but the peace of mind that comes with owning real silver is priceless.