Many people are skeptical of the CPI as a measure of inflation as the figures belie that of practical experience.  I’m sure everyone can list innumerable items that have increased in price at a level far above the CPI’s increases.

The following chart of historical long-term inflation (as measured by CPI) was seen on Doug Short’s blog November 17:

(click on image to enlarge)

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As one can see, CPI is depicted in red and blue (deflation and inflation respectively).  Doug has also superimposed (in gray) an alternate measure of inflation, that of the SGS Alternate CPI.  This measure is seen post-1982.

For those unfamiliar with the SGS Alternate CPI (explained here), it is a measure derived by John Williams, as seen on his Shadow Governement Statistics site, shadowstats.com.

As one can see, the current value of SGS Alternate CPI, at 8.51%, is considerably higher than that of CPI, at 1.17%.  As seen on the chart, this large disparity has existed for years.

The need for an accurate understanding of the rate of inflation (or deflation) can hardly be overstated.  Everything ranging from policy decisions to standard of living issues is impacted.  Needless to say, inflation at roughly 5-10% (a range seen in the SGS Alternate CPI since the early 90′s) is much different than that seen in the CPI figures.  This difference is really magnified once one compounds these annual rates.

I like to think of the inflation / deflation issue in a different light than that seen in the CPI or SGS Alternate CPI terms; and as such, do not “endorse” either.  However, I think it is important to recognize and follow both the CPI and SGS Alternate CPI trends.

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A Special Note concerning our economic situation is found here

SPX at 1217.90 as this post is written

From the homepage, “The Billion Prices Project is an academic initiative that collects prices from hundreds of online retailers around the world on a daily basis to conduct economic research.”

Two of the most prominent benefits I see from the data include that data is available daily and it serves as a comparison and is plotted against the CPI (last available data) for references purposes.  The current (as of 11-22-10) “Billion Prices” index value for the U.S. is 100.51.

As well, data is available for a number of countries.

This data from  “The Billion Prices Project” should be interesting to monitor going forward…

A Special Note concerning our economic situation is found here

SPX at 1180.73 as this post is written

President Obama, during an April 2, 2010 speech

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Although the CPI and various other cost and inflation indices have been relatively subdued for many years, it is inarguable that many costs routinely experienced by the average American have dramatically increased.  Perhaps the main resultant effect of these cost increases are for the average citizen to (continually) experience a declining standard of living.

Over the last few months, many costs have been rising sharply.  These cost increases are most pronounced among many commodities, as discussed in this April 23 Wall Street Journal article “High Cost of Raw Materials.”

These pervasive cost increases are also impacting many businesses in pronounced ways.  I will be discussing this in a subsequent post as these impacts are little understood, yet will likely have large future effects.

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SPX at 1162.89 as this post is written

As seen in the two-year daily price chart below, the $1000 level has been a pivotal area:

Gold Daily 2-Year Chart

Chart Courtesy of StockCharts.com

For a variety of reasons I am closely watching whether this $1000 price level will be surpassed.  I am under the impression, due to a variety of factors, that either gold will soon strongly surpass this $1000 level, or fail to and begin a strong descent.  In essence, I think we have approached the “moment of truth” for gold, and it will “break” from this $1000 level decisively either up or down.

As many know, gold has a long-standing reputation as performing strongly during what is perceived to be inflationary conditions.   As such, how it performs here in the short-term could prove instructive on this topic, which would impact many other markets.

The hyperinflation / inflation / deflation debate is of foremost importance at this time for many reasons.  How this debate is “answered” will have vast implications for investors, business, and the nation’s financial standing.

SPX at 1003.24 as this post is written

http://www.crestmontresearch.com/pdfs/Stock%20Inflation%20&%20PE.pdf

It shows the effect of inflation and deflation (as defined by the CPI) on the P/E Ratio. I think that it is worth looking at for a variety of reasons.

One of the reasons I point it out is that it provides some historical background to the Inflation/Stock Valuation topic I discussed in the article “Does Warren Buffett’s Market Metric Still Apply?”

The “inflation is good for stocks” theory is widely held.  The logic says that inflation promotes higher revenue and earnings.  In my opinion this logic is theoretically flawed and/or incomplete.   From a practical perspective, history shows it isn’t justified, as indicated in the chart.

Furthermore, even if inflation were to appear favorable to stock prices, one has to view the stock market returns on a “real” basis.

SPX at 995.81 as this post is written