I'm honestly surprised inflation hasn't been worse than what we've already seen. 10-year treasury yields are still well below their 2019 levels and are currently below their levels from Q2 of this year.
I’m not an economist, but it’s hard to shake the feeling that the CPI is gamed somehow, or at least the official government numbers do not reflect the bubble of the US I live in. My friends and family are seeing record wages and investment growth, but when my generation cohort looks at housing and all the numbers there are proportionally even higher, and people are selling 3 year old cars for nearly the nominal price they paid for it 3 years ago.
There was an article the other week from Canada about their CPI (I can't find it right now). Their CPI calculation was using prices that were half those available in stores (butter was one product, there are large variations in prices for some primary products in Canada because of producer's co-operatives particularly in dairy), and used sizes for some products that haven't existed for decades.
CPI calculations are very tricky. Deflation in telecoms, for example, has been very understated because how do you compare a data plan with a voice plan (in the UK, they had to adjust two decades of CPI numbers because of this calculation error). Imo, we place far too much reliance on CPI which is, after all, only one measure of inflation. Everyone seems to believe that prices are rising faster than CPI, and they would probably be right (I am in the UK, food prices in Canada particularly are...out of this world...particularly for meat, which seems to cost at least 3x the price here).
First? I think this is an ad. Newspapers are paid for placement articles like this all of the time. Now, how much oversight is placed upon such ads-articles, depends upon the publication.
The Star is well respected, so I suspect there's some strong oversight on opt-ads by them. EG "Please write about us", more than "Here's an article we've written for you." However, I'd be surprised if some cash didn't change hands.
Second? This doesn't mean the premise is wrong. Part of the problem is how vast Canada is. Local production in Canada, crossing 4+ timezones and 10000km, is going to result in local shortages of products, and thus, local price spikes in produces.
For example, if you have a local butter shortage one year, shipping from 5k away will raise the price.
Again, my above comments aren't meant to debunk this article, just provide some additional data.
Oh, also.. pricing is indeed different in the UK and Canada. I visited... 5? years ago, during a particularly rain free, heat wave summer. Was nice, btw. :) But during my visit I did see those massive pricing differences in some things.
Of course, UK pricing for wood and fuel was outrageous for me (just things I noticed, and these are things plentiful in Canada).
But you're right about market controls in Canada, which are designed to ensure supply, and keep farmers in a profitable state. The US, for example, does this in a different manner, for example, they don't limit production, they buy excess.
On the dairy side for example, they buy excess milk and make "government cheese", which can be stored longer than milk (years), and is often given to the poor.
I also have a pet theory that CPI understates the cost of housing due to people who are pushed out of entering the market altogether (e.g. homelessness rising, people living with parents longer)
Sort of the same way some people say unemployment figures understate the true number by ignoring discouraged workers / people who have stopped looking altogether. I have a hunch there are many discouraged folks who have stopped looking for housing altogether.
Of course preference is included in CPI. Weightings are adjusted periodically as consumer spending patterns shift, and price elasticity is explicitly factored on a quarterly basis in chained cpi
Well, it’s based on a survey. (And surveys are cursed instruments [1].)
> Generally, owners' equivalent rent is obtained through surveys asking homeowners the following question: "If someone were to rent your home today, how much do you think it would rent for monthly, unfurnished and without utilities?" [2]
I would guess that some owners’ ideas of what their house would rent for might lag the market?
So what housing cost metric should be looked at? The cost for a retiree living in their paid off home? The mortgage payment for brand new homeowner with minimal down? The cost to split an apartment for 2 people? What objective measure should be used?
CPI will never been perfect. They could even break it down into 3 categories:
1. Poor man’s CPI: ramen, rent & public transit
2. Middle class’s CPI: house, beef & cars
3. Rich man’s CPI: penthouse, luxury goods & sports teams
How do you combine them into one number, in a way that isn't "cooked"? Proposing we mash up all data ever into one figure, without detailing how, is useless
Is it? Can’t game it much or for long without being obvious because it’s compounding. Let’s say inflation is understated by 4% absolute per year. Over 40 years, that’s a factor of 4.
Fuel would be hard to game. It’s just fuel. Other components are trickier to calculate, like aggregate food prices or things involving hedonic regression. If there is gaming, you’d have to look at the tricky parts.
Well if you don’t think we’ve gamed fuel but do think we’ve gamed CPI significantly (ie several percentage points per year for decades), then we have made REMARKABLE progress in reducing fuel costs over the last 40 years, with fuel efficiency improvements on top of that.
Housing in your area might get vastly more expensive, but housing somewhere else might not see the same price increase. The CPI is for the entire country
> Mandatory expenditures, such as Social Security, Medicare, and the Supplemental Nutrition Assistance Program account for about 65% of the budget.
The budget is about 6 Trillion US dollars (FY22). Take 65% of 6 Trillion and start multiplying it by CPI and you'll see why it's in their best interest to understate it, and understate it greatly. If it were calculated higher, they'd have to borrow more than the $1.9 Trillion that they already are. To pay for a single year.
If you look at the debt chart, you'll notice it basically starts growing, and growing exponentially, around 1970, when Nixon took the US off the gold standard and going to a fiat currency with no real backing other than the gov'ts word, and the people believing in it. That's waning.
It feels to me like assets all inflated first, and when that failed to pop it was an omen of the future inflation which would follow. It seems like there is a tsunami of inflation that is just starting to hit the economy, and because of the early asset bubble it is too late to find obvious safe havens to protect inflation vulnerable assets.
Your choice at this point, barring some insider information on specific companies, seems to be to have to follow the FOMO wave into an already insanely overvalued market with the hope that you can get out before it all comes crashing down.
Do treasury yields actually have a causal relationship with anything besides the demand and supply of treasury bonds? I don't see any reason why we can't have a negative real yield (indeed, I suspect that is presently the case).
You may be right on the negative real yield. My thinking was that, ceteris paribus, if expected inflation is rising I would expect interest rates to rise as well. QE has likely been playing a large role in muting this effect.
The Fed is artificially holding real yields negative on the short end for years at a time to enable money-losing ventures to "prosper" in order to "stimulate" the economy. It gets people working and society running but the long-term misallocation of capital can't be good. Real yields have been negative out to 30 years for some time now, meaning the real economy could well be full of stuff that destroys value over a 30-year horizon as a norm!
There is actually a parallel effect of QE that no-one really wrote about: it causes a shortage of risk-free assets, and makes it harder for savers to fund liabilities.
I can believe that QE had a positive portfolio effect in the early 2010s. But no-one really acknowledged the downsides (it took them most of the 2010s to work out why QE "worked").
So we have the amazing situation where you will get funding for a project, but only if you promise to lose money. Investment into real assets is extremely low, chemicals and O&G are trading on mid-single digit P/E ratios, and are furiously trying to return capital...whilst we have massive shortages...it is a very unusual situation. And, imo, the cause of this is the shortage of risk-free assets (because creating this shortage, due partly to regulatory restrictions, did not mean that investors suddenly started making investments into the real economy...most couldn't...they just had to buy more "risk-free" assets from corporates who already had too much money or PE funds that were playing the capital cycle...ofc, no central banker understands that some institutions are limited, the textbook doesn't teach that, they don't understand it).
I don't think it's that Jerome Powell doesn't understand. Rather the central bank only has a few tools (interest rates/QE) to nudge the economy in the right direction. It takes real policy (Congress and the White House) to direct the investment to the more sustainable long-term investments
Here is the problem: if Powell is too successful with monetary tools, what incentive does it leave the policy side to do anything at all? He isn't powerless to force policy action by holding the line, but understandably he's more interested in keeping his job.
Risk free assets don’t exist. So by definition, they are always in short (0) supply.
Even treasuries are at currency, inflation, and interest rate risk. If you are using risk free as a synonym for us treasuries , that’s what qe has been pumping into the system. Are you saying you want even more qe ?
It's worth noting that the breakeven rate is measuring what market participants are expecting the "official" inflation rate to be, as measured by the CPI-U. That may differ meaningfully from changes in the cost of living as experienced by the average American.
> meaning the real economy could well be full of stuff that destroys value over a 30-year horizon as a norm!
This is probably somewhat hyperbolic since companies who borrow anywhere in the ballpark of the risk-free rate (i.e., large, responsible, and generally financially conservative organizations) typically have an internal hurdle rate that is well in excess of their cost of capital.
What is true is that the hurdle rate exceeds the cost of capital mainly as a risk mitigation mechanism; it is a margin of safety. IRR projections almost invariably depend on certain assumptions about future business conditions. So artificially depressing the cost of capital can result in "more marginal" projects getting the green light, and therefore can increase the potential for financial damage in a serious recession. You can think of it as "risk leverage".