Inflating inflation part deux | Financial Times


Over two years ago, FT Alphaville took a close look at economist Steve Hanke’s dubious claim that inflation was running much higher in Turkey than the country was claiming.

By reverse engineering an inflation number from the dollar/ lira exchange rate, Mr Hanke had posited the figure was closer to 40 per cent rather than the reported 11 per cent. His logic, as it turns out, was all over the place — as the FX figure is only one of the many supply-side factors that determines a country’s CPI. And that’s before even looking at what’s going on with demand.

Yet, Mr Hanke is not alone in thinking inflation is much higher than they (that is, the shadowy authorities) would you like to believe. For decades, goldbugs have been banging on about how currency debasement, usually driven by a money printing central bank, is being masked by a flawed CPI reading. This trend only accelerated with the advent of quantitative easing in the post financial crisis era and the subsequent run up in the shiny stuff which popped in 2011 when the “loose monetary policy = inflation” thesis collapsed.

You’d think after some of the US most esteemed academics and financiers — from Seth Klarman to Paul Singer — were proven wrong that hyperinflation was coming due to the Fed’s actions, the rest of the bears would back down and check their priors.

Yet we didn’t factor in the emergence of another set of sound money nutters: the crypto bros.

To that point: here’s a blog post from FT Alphaville favourite, and crypto-enthusiast, Anthony Pompliano (aka Pomp), arguing “Inflation Is Killing The American dream” that could have been written in 2010.

Pomp starts off by arguing that CPI is a flawed measure. Which we tend to agree with. That’s not the issue though. The problem is what he thinks is a better measure.

Pomp defers to an inflation index called The Chapwood Index. The website of which, you can find here.

And what’s it all about? Well, here’s some of the blurb:

The myth that the CPI represents the increase in our cost of living is why the Chapwood Index was created. What differentiates it from the CPI is simple, but critically important. The Chapwood Index:

— Reports the actual price increase of the 500 items on which most Americans spend their after-tax money. No gimmicks, no alterations, no seasonal adjustments; just real prices.

— Shines a spotlight on the inaccuracy of the CPI, which is destroying the economic and emotional fibre of our country.

— Shows how our dependence on the CPI is killing our middle class and why citizens increasingly are depending upon government entitlement programs to bail them out.

— Claims to persuade Americans to become better-educated consumers and to take control of their spending habits and personal finances.

And here’s how that translates into inflation across major US cities over the past five or so years:

Twelve per cent inflation in New York? Ooof. That’s prices doubling every six years or so. That can’t be right can it? That also implies real growth is deeply negative, which should show up in living standards and employment. Yet, up to Covid, unemployment in America was the lowest it has almost ever been.

So what is going on here?

Well first, FT Alphaville thought we’d look at the methodology for how the Chapwood Index came to the 500 items in the price index. From the website:

The government’s baseline CPI measure excludes items such as taxes, energy, and food. It is clearly manipulated and biased, therefore it is rarely accurate. In creating the Chapwood Index over a 2 year period we collected over 4,000 items from friends and associates around the country of items they spend money on in the daily course of their lives. We then narrowed the list down to the top 500 items that were used most frequently. We then track and monitor the price increase of these 500 items without any manipulation and biases. This is important to underscore. We take the precise price for the same item quarter by quarter and calculate the increase or decrease. We tracked the prices on a quarterly basis and created a weighted index based on price. These items include basically everything that most Americans consume during the regular course of their lives.

OK fair enough. Although they’re wrong, CPI does include food — it’s literally on the main page of the BLS’ website — but we’ll let that slide.

So what are these 500 items that are giving such a radically different, and more realistic, reading of inflation?

The full list is online, but here’s a screenshot of some of the items in case you can’t be bothered to open a new tab:

Yes, that’s right, this price list index includes such middle class activities as personal training, dry cleaning and filet at a steakhouse. Just your Average Joe’s sort of consumables.

Scroll down, however, and it gets better. The list also includes first class airfare, boat rental, private school tuition, country club fees, valet parking, golf clubs, horseback riding lessons and a deluxe folding chair. (On a side note: what makes a folding chair deluxe? We’ll have to ask How To Spend It.)

In fact, when you step back it’s clear the Chapwood Index isn’t really a measure of inflation as much as a measure of inequality. Private school fees have risen not because of currency debasement, but because there’s too much global wealth chasing a scarce resource. Same could be said for a country club or a, errr, deluxe folding chair. Perhaps it could be used as a measure alongside the Gini coefficient for tracking inequality. Perhaps.

Anyway, what the Chapwood Index isn’t a good measure of is inflation. At all.

So why is Pomp pushing it? Well, you guessed it! It’s good for Bitcoin:

Savers are punished and investors are rewarded. This is the number one reason why I am bullish on something like Bitcoin. It is the single greatest protector of wealth in the world. There is extreme volatility in the short term, but over a long period of time, Bitcoin shines. It does a great job of preserving purchasing power and avoiding the perils of fiat currency devaluation.

As more people become aware of this structural advantage, I believe we will see a cascade of capital flows into the asset. What looks like a speculative asset to some today is actually the parachute that they desperately need. It is just a matter of time until the mainstream citizen is educated on this topic. Those who understand it early, and have the courage/conviction to act, will be in a better position than others.

That’s the narrative anyway.

But we should remind him that a decade ago, goldbugs had the same thesis when the pet rock topped $1,800 per ounce before entering a bear market for over half a decade.

Narratives after all, are only useful for as long as everyone believes they’re true. After that, who knows?

Related Links:
Inflation is higher than the official numbers — FT Alphaville


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