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.
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.