Is Inflation Really 10%?

Money, Piggy Bank, Coins, Finance, Save, Pig, Euro

One of the long running themes on this website is low inflation and debunking narratives about how very high inflation might be around the corner. I like to work from a first principles understanding, looking at things for what they are and trying to be as objective as possible. Overall, my predictions about low inflation and low interest rates over the last 10 years have been mostly spot-on.

Sure, in the last year I’ve been predicting rising inflation due to the huge stimulus measures, but I want to keep that in perspective – when I say I expect higher inflation I am saying that I expect inflation to return to 2019 or higher levels and that the Fed could start to feel pressure to raise rates by 2022. That means 2-3% inflation and rising rates. It doesn’t mean a return to the 1970s or something like Zimbabwe.

Anyhow, there’s a narrative going around that inflation is 10% or more based on some index called the Chapwood Index (they actually claim a 9.9% average over 5 years in 50+ cities). It’s worth exploring because the cost of many items that feel essential (education, healthcare and real estate in particular) make it seem like inflation is higher than we’re being told. So let’s dig in.

1) Inflation of 10% is Inconsistent with Other Data. 

The first item that makes this narrative difficult to believe is the idea that inflation has been so much higher than nominal GDP. Nominal GDP has averaged just 3.6% in the last 10 years. So, if inflation has been 10% or more for much of this period then that means our economy has shrunken by 50% since 2010 and 80% since 2000 in real terms.

Here’s how this looks vs reality. And bear in mind – this. Is. Absurd. On. Its. Face.

The main problem is that it is inconsistent with a ton of other verifiable data like wage growth, employment, corporate revenues, factory output, and on and on. To believe that the economy has been shrinking at a rate of 6%+ per year is simply unfathomable.

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