January 27th, 2023
Changes Coming in Inflation Reporting
The Fed’s Bureau of Labor Statistics (BLS) recently announced changes to the way the Consumer Price Index (CPI) measures inflation. The Fed’s February 12th announcement will include these newest changes.
The government constantly fiddles with the CPI calculations, normally to make themselves look good, or at least not as bad. Some years ago, in researching for my college class, I came across an article that said the CPI calculation had changed 22 times in 30 years since 1980 and each time the reported inflation numbers were lower than they would have been without the change.
As you and I go about our lives, we can see that gasoline prices are almost double what they were two years ago. Food prices are way up. Rents and home prices, too. But the reported CPI is up only single digits. What is wrong with this picture?
If a picture is worth 1,000 words, a chart is worth 1,000 numbers. In the chart, below, ShadowStats.com shows the Currently reported CPI numbers (red line), alongside the CPI if the 1980 formula were still used (blue line).
If you are like me, the blue line showing inflation peaking at 17% a few months ago, more accurately reflects our reality better than the government’s current reporting in the red line.
Starting in February, the CPI calculation will change the base reporting number used in year-over-year inflation reporting. I won’t bore you with the math behind it, but according to Luke Gromen who publishes Forest For The Trees Newsletter this change “seems likely to step up year-ago inflation comparisons, beginning almost immediately, leading to the likelihood of a series of sharp drops in reported CPI in coming months, even if nothing else changes.“ The article mentions that due to these changes, by June of this year, the CPI could end up being 2-3% lower than currently reported. That is a big adjustment! There must be an election coming up.
Wise investors should note that lower currently reported inflation will not wipe out the price increases of the past two years. Prices will remain painfully high even though the CPI is moderating and history suggests that the winds of inflation will continue to blow for quite a few years.
I can’t wait to see what ShadowStats reports a few years from now about real-life inflation vs the government calculations.
* The model accounts mentioned in this article are hypothetical examples of how the strategy may work as designed. Performance and activity in client accounts may be different from that in the model in amount of each investment, specific timing of trades, and actual security used, which may vary from account to account. Not all trades are profitable. It should not be assumed that current or future holdings will be profitable. A list of all trades in these accounts for the past 12 months will be provided upon written request.
** Indexes are unmanaged lists of stocks considered representative of a broad stock market segment. Investors cannot invest directly in an Index.
This newsletter may contain forward-looking statements, including, but not limited to, statements as to future events that involve various risks and uncertainties. Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause actual events or results to differ materially from those that were forecasted. Information in this newsletter may be derived from sources deemed to be reliable, however we cannot guarantee its accuracy. Please discuss any legal or tax matters with your advisors in those areas. Neither the information presented nor any opinions expressed herein constitute a solicitation for the purchase or sale of any security.
In all investing, past performance cannot assure future results, and as such, our efforts are not guaranteed. Losses can occur. All strategies offered by Shadowridge Asset Management, LLC, adapt to changes in the markets by changing the investments they hold, therefore, comparisons to broad stock market indexes such as the unmanaged indexes mentioned may not be appropriate. Sometimes client accounts are invested in stocks or markets not included in these indexes. Past performance does not guarantee future results. Investment return and principal value will vary so that when redeemed, an investor’s account values may be worth more or less than when purchased. Mutual fund shares and other investments used in our managed accounts are not insured by the FDIC or any other agency, are not obligations of or guaranteed by any financial institution and involve investment risk, including possible loss of principal. Advisory services offered through Shadowridge Asset Management, LLC, a Registered Investment Advisor. Adviser will not transact business unless properly registered and licensed in the potential client’s state of residence.
Copyright (C) 2023 William T. Hepburn. All rights reserved.