HardAssetsInvestor

Written by Brad Zigler  |

August 14, 2008

Computing Inflation In Real Time

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Today, journalists and pundits waited for the monthly inflation reports to be released by the U.S. Bureau of Labor Statistics (BLS). Upon their issuance, newsrooms become frenzied as ink-stained wretches put out calls to economists and sell-side analysts for comments.

Calls went in the opposite direction, too, as pundits tried to get their names and their quotes in print (or electrons for the digital editions) for their clip files.

It's, in a way, quaint. There's the government, dropping a pearl once a month, and there's the journos who scramble after the bauble, hold it up to the light and try to divine the health of the oyster that spawned it.

The problem is that nobody really puts much stock in the inflation numbers issued by the government anymore. It doesn't much jibe with people's lived experience, judging from the stories I hear. For the most part, hedonic pricing and the carving out of food and energy prices from "core" inflation seem to be weasling techniques meant to downplay the virulence with which prices are rising.

This morning, the BLS clocked the Consumer Price Index (CPI) rising at a 5.6% annual pace, but nobody I know buys into that.

For those who distrust the government's take on inflation, or who just don't want to wait a month for the next indication, I propose a new method: one that allows you to gauge inflation in real time from readily obtainable information.

If inflation's the loss of purchasing power metered by price changes, why not use a monetary constant like gold to take its true measure?

Gold's price is readily available as is the dollar's value against other currencies. You could, for example, keep track of the price of gold in greenbacks and in euros. The difference in the rates of appreciation (or depreciation) can give you the basis for calculating your purchasing power loss (i.e., inflation).

In May 2006, for instance, gold sold for $658 or €515. As of yesterday's morning fix, the metal was worth $817 or €549. That's 24.2% appreciation in the dollar price, but barely a 7% uptick in terms of euros. Annualizing the difference in the rates of return gives you an implied inflation rate of 13.6%.

And that, people tell me, is a much more realistic estimation of the price shocks they've countenanced recently.

 

Inflation Measured By Gold

 

(See implied inflation via gold.)