November 2012 Index

December 20, 2012

Official Inflation Data Says Consumer Prices Fell in November

According to the latest data from the Bureau of Labor Statistics, November saw a 0.3 percent decline in prices for all urban consumers. The basket of goods used to calculate consumer prices was primarily driven lower by monthly drops in the prices for energy, medical, apparel, and autos. Year over year, the Consumer Price Index (CPI) basket of goods showed a 1.76 percent increase in prices.

The basic, essential needs tracked in the Guild Basic Needs IndexTM(GBNI) also saw a decline from October as energy prices declined. However, the last twelve months saw an approximate 8.6 percent increase in the prices of the food, clothing, shelter, and energy components tracked in the GBNI (see charts below).

CPI is Being Engineered Lower to Help Balance the Budget

At Guild Investment Management, we have written for years about how inflation data is manipulated and adjusted to show a slower-than-actual increase in the cost of living. We believe that this process takes place in most countries that provide price data — not just in the U.S. This week, the Washington Post discussed one way the Federal Government hopes to reduce its budget deficits and future obligations, by reducing the CPI through the use of ‘chained CPI’. It is no secret that by reducing the admitted CPI, the Fed can slow the growth in outlays it must make for Social Security and other entitlement programs.

As we reported last year in our August 3, 2011 Global Market Commentary, chained CPI considers that when the price of a particular good rises, people ‘trade-down’ to a cheaper alternative. For example, in his Washington Post article, author Ed O’Keefe writes that people may substitute chicken for more expensive beef, or lettuce for more expensive arugula if prices rise. He states that “chained CPI attempts to account for how people react to inflated prices”.

How Many Times can Consumers Trade Down, Before their Standard of Living is Noticeably Lower?

So, if the government is going to artificially adjust down the published rate at which prices are rising, how long will it be before government benefit recipients will only be able to afford very low quality goods? Further, for the rest of the population, how long can adjusting inflation rate down hide the fact that their standard of living is being squeezed?

The GBNI tracks food, clothing, shelter, and energy (used for heating, cooking, and transportation), not a general basket of consumer goods that are easily traded down. Moreover, the components and weightings in our index will never be adjusted or changed. This index was constructed and the data is being published to inform; we have no reason to manipulate the number higher or lower. The charts in our GBNI write-ups clearly demonstrate that prices of basic, essential needs (food, clothing, shelter, and energy) may be more volatile, but have also risen much more over the past several years than the generally-accepted consumer goods basket represented in the manipulated-lower CPI.

December 6, 2012

The Prices of Basic Needs Do Not Wait for the Fiscal Cliff Resolution

Nervousness and uncertainty have hurt demand for certain assets and investments. While the fight in Washington can cause price (and demand) deflation in some things, other items are immune. Throughout the economy, there are many business, investment, commercial, and financial decisions and transactions that are ‘on hold’ until the President and Congress are able to iron out some sort of deal that gives clarity to tax rates, and government spending levels, going forward.

Then, there are some financial decisions and transactions that cannot wait. Necessities like food, clothing, shelter, and energy used for cooking, heating, and transportation need to be consumed by every American regardless of the income tax rate, dividend tax rate, capital gains rate, or whether the government plans to address its deficit-spending ways.

People are predicting a significant drop in economic activity in 2013 if the fiscal cliff (a combination of automatic tax increases and government spending cuts) is not averted in the next few weeks. Some say the economy could slip back into recession as workers across America all of a sudden have less take-home pay. Not to mention that a recession would likely cost the economy millions of jobs. In this scenario, demand for goods and services would drop, and therefore one would expect prices of goods and services could also drop. Even in this scenario, we do not expect the public’s need for basic, essential items like those that we are tracking in the Guild Basic Needs IndexTM(GBNI) to drop much… after all, they are basic needs.