December 2012 Index

January 24, 2013

final inflation data for 2012 was released. December Consumer Price Index (CPI) was flat with November due to falling energy prices offsetting rising food prices. The full-year inflation came in at 1.7 percent, well below the Federal Reserve’s 2.5 percent target that might prompt an end to their monetary stimulus programs. 1.7 percent may not sound like a big number, but if you look deeper into the inflation number, and you look over a longer period of time, the numbers get big. For example, the prices of basic, essential needs items found in our Guild Basic Needs IndexTM (GBNI) which measures the prices of food, clothing, shelter, and energy (used for heating, cooking, and transportation) in the U.S. have risen almost 80 percent since January 2000. The CPI’s increase over that period is 36.4 percent. When you consider that household incomes in the U.S. have not grown much at all over that period of time, the decline in Americans’ standard of living is evident.

Tracking the Prices of Basic Necessities

Last week, the Government’s final inflation data for 2012 was released. December Consumer Price Index (CPI) was flat with November due to falling energy prices offsetting rising food prices. The full-year inflation came in at 1.7 percent, well below the Federal Reserve’s 2.5 percent target that might prompt an end to their monetary stimulus programs. 1.7 percent may not sound like a big number, but if you look deeper into the inflation number, and you look over a longer period of time, the numbers get big. For example, the prices of basic, essential needs items found in our Guild Basic Needs IndexTM (GBNI) which measures the prices of food, clothing, shelter, and energy (used for heating, cooking, and transportation) in the U.S. have risen almost 80 percent since January 2000. The CPI’s increase over that period is 36.4 percent. When you consider that household incomes in the U.S. have not grown much at all over that period of time, the decline in Americans’ standard of living is evident.

When prices of basic elements of daily consumption go up, something on the more discretionary side must get cut back unless income rises as well. Of course what more Americans are choosing to do to support their standard of living is lean on the government’s generosity. With stagnating wages and rising prices, it is no surprise that a record number of Americans are relying on government assistance programs like the Supplemental Nutrition Assistance Program (SNAP), formerly referred to as food stamps, to help them meet basic needs.

Government assistance can ameliorate the impact of this declining standard of living for some people in the short term, yet it actually just spreads it around among taxpayers and defers it to future generations…but perhaps this might be a better discussion for another letter. The bottom line is price increases in basic, essential needs can be expected to continue, and they can be expected to outstrip the CPI, which includes many non-necessities.

When prices of basic elements of daily consumption go up, something on the more discretionary side must get cut back unless income rises as well. Of course what more Americans are choosing to do to support their standard of living is lean on the government’s generosity. With stagnating wages and rising prices, it is no surprise that a record number of Americans are relying on government assistance programs like the Supplemental Nutrition Assistance Program (SNAP), formerly referred to as food stamps, to help them meet basic needs.

Government assistance can ameliorate the impact of this declining standard of living for some people in the short term, yet it actually just spreads it around among taxpayers and defers it to future generations…but perhaps this might be a better discussion for another letter. The bottom line is price increases in basic, essential needs can be expected to continue, and they can be expected to outstrip the CPI, which includes many non-necessities.
Tracking the Prices of Basic Necessities

Last week, the Government’s final inflation data for 2012 was released. December Consumer Price Index (CPI) was flat with November due to falling energy prices offsetting rising food prices. The full-year inflation came in at 1.7 percent, well below the Federal Reserve’s 2.5 percent target that might prompt an end to their monetary stimulus programs. 1.7 percent may not sound like a big number, but if you look deeper into the inflation number, and you look over a longer period of time, the numbers get big. For example, the prices of basic, essential needs items found in our Guild Basic Needs IndexTM (GBNI) which measures the prices of food, clothing, shelter, and energy (used for heating, cooking, and transportation) in the U.S. have risen almost 80 percent since January 2000. The CPI’s increase over that period is 36.4 percent. When you consider that household incomes in the U.S. have not grown much at all over that period of time, the decline in Americans’ standard of living is evident.

When prices of basic elements of daily consumption go up, something on the more discretionary side must get cut back unless income rises as well. Of course what more Americans are choosing to do to support their standard of living is lean on the government’s generosity. With stagnating wages and rising prices, it is no surprise that a record number of Americans are relying on government assistance programs like the Supplemental Nutrition Assistance Program (SNAP), formerly referred to as food stamps, to help them meet basic needs.

Government assistance can ameliorate the impact of this declining standard of living for some people in the short term, yet it actually just spreads it around among taxpayers and defers it to future generations…but perhaps this might be a better discussion for another letter. The bottom line is price increases in basic, essential needs can be expected to continue, and they can be expected to outstrip the CPI, which includes many non-necessities.

Tracking the Prices of Basic Necessities
Last week, the Government’s final inflation data for 2012 was released. December Consumer Price Index (CPI) was flat with November due to falling energy prices offsetting rising food prices. The full-year inflation came in at 1.7 percent, well below the Federal Reserve’s 2.5 percent target that might prompt an end to their monetary stimulus programs. 1.7 percent may not sound like a big number, but if you look deeper into the inflation number, and you look over a longer period of time, the numbers get big. For example, the prices of basic, essential needs items found in our Guild Basic Needs IndexTM (GBNI) which measures the prices of food, clothing, shelter, and energy (used for heating, cooking, and transportation) in the U.S. have risen almost 80 percent since January 2000. The CPI’s increase over that period is 36.4 percent. When you consider that household incomes in the U.S. have not grown much at all over that period of time, the decline in Americans’ standard of living is evident.
When prices of basic elements of daily consumption go up, something on the more discretionary side must get cut back unless income rises as well. Of course what more Americans are choosing to do to support their standard of living is lean on the government’s generosity. With stagnating wages and rising prices, it is no surprise that a record number of Americans are relying on government assistance programs like the Supplemental Nutrition Assistance Program (SNAP), formerly referred to as food stamps, to help them meet basic needs.
Government assistance can ameliorate the impact of this declining standard of living for some people in the short term, yet it actually just spreads it around among taxpayers and defers it to future generations…but perhaps this might be a better discussion for another letter. The bottom line is price increases in basic, essential needs can be expected to continue, and they can be expected to outstrip the CPI, which includes many non-necessities

January 10, 2013

Central Bankers are Being Asked or Told to Tolerate — If Not Engineer — Higher Prices

Around the developed world, central bankers are ratcheting up their tolerable inflation target rates. Government officials in these countries are worried about the longer-term effects of chronically high unemployment and deflation, and have started to lean heavily on their central banks to spur growth… at the expense of cost of living affordability.

Politicization of Central Banks is a Global
Trend… and Will Lead to Higher Prices

Monetary authorities encouraging higher prices is a relatively new development; one that is likely to accelerate as central bank independence wanes. The most recent blatant example of government involvement in central bank policy is in Japan, where the newly-elected ruling party has practically given the Bank of Japan (BOJ) marching orders: PRINT, PRINT, PRINT…and get that yen down. We have to agree that the yen has been too strong and needs to weaken for the Japanese economy to grow, but we also recognize that the party’s efforts will drive up the price of goods that Japanese citizens buy everyday — many of which are imported.

James Bullard, the U.S. Federal Reserve Governor from the Saint Louis Fed, gave a presentation last week about the decline in central bank independence. In it, he refers to the ‘Fiscalization’ of monetary policy as making a fundamental shift to the macroeconomic environment.

The conventional role of central banks (to act as stabilizing forces, and defend price stability) is being cast aside. Instead, there have been a lot of central bank policies that seem to prioritize funding their respective governments. For example, European Central Bank’s Outright Monetary Transactions (OMT) Program, is essentially a promise to buy government bonds of member countries if they meet certain fiscal targets. In the U.S., the Federal Reserve’s trio of QE programs has resulted in the Fed buying about 80 percent of the U.S. Treasury’s borrowing. Also, in the UK, the Bank of England’s bond-buying program has certainly helped the government patch revenue shortfalls.

Economic growth could be one of the results of central banks’ fiscalization efforts, but will it be ‘real’ economic growth?

Governments’ Inflation Dichotomy

Even though governments may want a little inflation in the system, we do not expect them to fully own up to it. On one hand, government officials like to understate the inflation rate; on the other hand they want to boost the level of inflation in the economy to inspire more economic activity. So, while the official data suggests very slow price increases, other price measures, such as our Guild Basic Needs IndexTM

– which we created to track the prices of basic and essential needs like food, clothing, shelter, and energy — will continue to illustrate the underlying price movements that affect people’s everyday lives.

We believe higher prices are on the horizon in the developed world… in fact, they are already evident throughout the developing world.