Inflation Is Already Here

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All it takes for me to know that inflation has already landed here in the States is to take a stroll to the nearby Whole Foods for lunch. After more than four years of visiting the same grocery store about three to four times per week, I've been able to anecdotally observe more than a few distinct and powerful trends in pricing.

A scientific survey it most certainly is not, but I will say that lately I'm walking out of there paying 15%-25% more than I was paying for similar foods (in similar amounts) just a year ago. Whole Foods appears to be slowly (but surely) raising prices.

Something stinks
These days, the government will quickly assure you that problematic inflation is officially not happening. Recent Consumer Price Index reports suggest that inflation levels are far below "norms" and have barely even been positive. But upon closer inspection, numerous underlying metrics beneath the CPI are indicating otherwise. If you take the time to examine the CPI's makeup, you'll quickly realize why.

With more than 40% of the index's constitution tied to housing costs, the index is heavily anchored down by numbers that are in the middle of a massive, ongoing retrenchment. That's fine -- our housing problem is quite a unique one. But the fact is there's a whole lot more to this story. According to the official CPI numbers, food and energy costs are barely rising, too. Here's the problem: That is a ridiculous understatement -- food and energy prices are zooming. So what exactly is the disconnect here? Why is the CPI failing to capture significant undercurrents of inflation?

The facts say otherwise
I'm certainly not calling it a massive government conspiracy, but I think it's absolutely safe to say that the CPI numbers belie the true state of consumer purchasing power these days. Evidence is easy enough to come by. Examine the percentage change in the price of just a few major commodities between September 2009 and September 2010 against the CPI:

Source: The Wall Street Journal.

While the overall CPI has barely budged in the past year (up 1.1%) and food and energy costs (according to the same index) have been relatively tame (1.4% and 3.8%, respectively), we've seen incredible strides in the prices of many of the individual commodities that are supposedly fueling these government numbers. Wheat is up more than 34%. Corn is up more than 33%. Milk is up 32%. And oil is up 14%. Without a doubt, something massive is happening in the markets. And yet, official government numbers are telling us the opposite. There's clearly some underlying disconnect between the CPI and reality.

Corporate America knows
If it were actually true that inflation weren't here, why would numerous companies be considering raising prices in the middle of a terrible consumer environment? They absolutely wouldn't be. But, in reality, many companies are doing precisely that right now.

According to The Wall Street Journal, companies ranging from General Mills (NYSE: GIS  ) to United Technologies (NYSE: UTX  ) to Kraft Foods (NYSE: KFT  ) are in the process of raising prices in the face of such strong commodity price growth. They have to. Domino's (NYSE: DPZ  ) , for example, has seen cheese prices skyrocket 29% compared to 2009 and probably will have to institute its own price increases in the face of rapidly surging input costs.

Capital markets, too
If this isn't the very definition of an inflationary situation, then I'm not really sure I understand what the phenomenon really is. Truth be told, it's not just me who's having these sentiments. The financial markets are bracing for inflationary forces themselves. For the first time ever, according to The New York Times, the yield on inflation-protected securities sold by the U.S. Treasury went negative, implying that investors are pining for inflationary safe-havens. TIPS funds such as the iShares TIPS Bond Fund (NYSE: TIP  ) have returned north of 8% year to date. Whether the CPI likes it or not, inflation (or the very immediate prospect of inflation) is happening right now.

I suppose the question I'm curious about is why the CPI is failing to capture what appears to be such an obvious trend on a more granular level. I certainly have my theories as to why, but without getting into the messy details of the mechanics of the CPI itself, the answer is that it doesn't really matter actually why. It matters that it is. Inflation does, in fact, appear to have landed, regardless of whether the mechanism that is dedicated to track it (the CPI) wants to admit it.

It may not be the worst thing in the world, either. The fact is we're in the middle of a significant deleveraging process and controlled, aggressive inflation is going to help indebted individuals and governments slice through the value of their debt.

The Foolish bottom line
If I'm right and inflation is truly here, what should you do? For months now, I've been instructing family members to put large stores of cash in TIPS funds or the like. This is a defensive maneuver, of course. The thinking is that if you're a net saver, you're going to be punished in an environment like this and thus, you need to actively pursue measures that will help preserve wealth. TIPS will help do exactly that -- though clearly a lot of people are having similar thoughts right now.

If you're not too keen on giving your money to the U.S. Treasury to store (which might be a valid concern), consider an international TIPS fund like the SPDR DB International Government Inflation-Protected Bond (NYSE: WIP  ) . Or if you're an investor like me, stick your money in high-quality stocks. Productive assets selling useful products tend to not have huge problems staying afloat in environments like these.

Fool Nick Kapur spends too much money at Whole Foods. Whole Foods Market is a Motley Fool Stock Advisor selection. The Fool owns shares of Domino's Pizza. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (14) | Recommend This Article (16)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 01, 2010, at 9:52 PM, ilovesumm wrote:

    Well either its a conspiracy or a lot of poor addition skills , you pick what you want to believe.

    How oil, corn and milk aren't part of CPI is a mystery to me.

    EVERYTHING you touch or do is related to oil either directly or 1 step away or am I the only one

    paying for fuel ?

    Maybe the govt guys get oil , milk, and food for free so they don't think prices are rising?

  • Report this Comment On November 01, 2010, at 10:03 PM, l945 wrote:

    You are exactly right regarding the effect of housing on inflation figures. Is the Govt. lying or stupid or both?

  • Report this Comment On November 01, 2010, at 10:13 PM, TheDumbMoney wrote:

    I think it is fairly well known that CPI is not totally accurately descriptive of inflation, and if memory serves, the government has actually changed the variables one or more times in the last thirty years. Also, while I'm a fan of TIPS, keep in mind who is resetting the principle based on inflation....the government, and I'm pretty sure it resets based on the government's definition of inflation, i.e., CPI, making TIPS not so hot to the extent you are right about the CPI disconnect. As to both points, I'm just going based on a memory here that I think is 70% likely to be correct, haven't double-checked before blabbing off in the comments, as usual.

  • Report this Comment On November 01, 2010, at 10:26 PM, TigerPack1 wrote:

    UPS announces tonight they will raise shipping rates an average of 4.9% starting in January. I guess they lost BEN's memo that deflation is the problem, not INFLATION. I guess UPS employee wages, health care costs, benefit packages, rising fuel/energy prices, new truck and plane costs, high levels of capital expenditures to stay competitive, pension costs and other real world expenses do not fit the FED's crap being sold to America. I worry about next year's price increases for real businesses like UPS, AFTER we print tons more money in QE 2 and QE 3 in 2011!!!! Nobody's talking about the double-dip recession, the tanking Dollar or the second even larger bank bailout that are coming in 2011. Please attach seatbelts and put on your crash helmets.

  • Report this Comment On November 01, 2010, at 10:34 PM, TigerPack1 wrote:

    A good 40%-50% of CPI is based on a housing rent "model" that is always adjusted downward each year to understate real estate price increases. Real estate values and actual selling prices are nowhere to be found in the CPI. The actual inflation rate in the U.S. trailing 12-months is in the 3%-4% range (by my estimates) presently and about to jump considerably higher with all the new money printing to be announced on Wednesday afternoon. Social Security and TIPS and other government related programs saw a second year of NO increase in payments, despite a solid 4%-5% annual inflation rate. Great scam the FED and Treasury are running on everyone.

  • Report this Comment On November 01, 2010, at 10:54 PM, mshuler64 wrote:

    Well said! You are absolutely right on each and every point. Thank you for speaking out on an issue that is a concern for many of us!

  • Report this Comment On November 02, 2010, at 12:41 AM, l945 wrote:

    It is difficult to be respectful of government when it is so obvious what they are doing. If they would just admit their unfair policies it would help, but they obfuscate. I always understood that a gentleman does not lie, does not cheat, and does not steal. Is there any way we can entice more gentlemen into government--especially into the upper levels where examples should be set and integrity should be a primary consideration?

  • Report this Comment On November 02, 2010, at 10:29 AM, cmfhousel wrote:

    One explanation I've heard is that the increase in raw materials costs haven't been passed on to consumers because 1) producers have input costs hedged, and 2) they're eating the cost increases themselves instead of passing them off on consumers.

    Another is that raw materials costs are a fairly small portion of final goods -- the bulk is labor costs, and as we saw yesterday, wage growth is stagnant. As someone who drinks a lot of milk, I'm 100% sure the final store price hasn't doubled in the past year (at least in my neighborhood ... I'm sure it varies)

    No arguments against the CPI being terribly flawed, though. And good article as always. Wish more people could write like you.

  • Report this Comment On November 02, 2010, at 11:22 AM, TMFKris wrote:

    For those interested, here's a link to the Bureau of Labor Statistics' frequently asked questions section about the CPI.

    Kris - TMF copyeditor

  • Report this Comment On November 02, 2010, at 8:33 PM, beadgrrl wrote:

    I think the Price Change chart is confusing. According to the chart, all of the items in the list, including CPI, have "changed" at least 100%. I think you meant to portray that the CPI has not changed and the other items have changed between 10 and 30 percent. Perhaps the chart should be labeled "Prices compared to previous year" or some such thing.

  • Report this Comment On November 02, 2010, at 9:51 PM, minnjim1 wrote:

    Regarding the Price Change chart, I wouldn't say it's confusing or misleading.... I would say it is simply WRONG. Price Change of 132%? No, that is simply WRONG. Isn't there an editor at TMF who can catch big mistakes like this before they go live? Or how about one who can correct the mistake after it's pointed out?'s a about an art department that doesn't produce a chart that's WRONG?

  • Report this Comment On November 03, 2010, at 6:58 AM, TigerPack1 wrote:

    The 132% price change will be more accurate in a year or two! LOL... Crying actually.

  • Report this Comment On November 13, 2010, at 5:47 PM, FutureMonkey wrote:

    Once inflation shows up it will be too late to move on it. At least a portion of every portfolio should have an inflation hedge. Right now we are flat, but at some point it is going to take off. I'm still thinking 3-7 years out, but I'm prepping my allocation now.

  • Report this Comment On November 16, 2010, at 5:30 PM, thatzmagic wrote:

    The chart itself is not wrong, but the title is more misleading. Because the baseline starts at 100%, its easier to simply subtract 100 from each plot, and you'll get the actual percent change. Interesting article, guess we'll see what happens next...

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