Despite the cheers, inflation continues to eat into Americans’ savings. Much more than the official figures suggest.
Prices always rise
The US annual inflation rate eased to 3.20% in October. We were at 3.70% the previous month and 7.75% a year ago. It even soared to 9.1% in June 2022.
Inflation is now equal to the long-term average of 3.3%. In other words, prices continue to rise. You have to go back before 1960 to find a year without inflation…
Furthermore, everyone knows that the consumer price index (CPI) reflects reality very poorly. Another more realistic index is the Chapwood Index. The latter reports on a fixed list of 500 popular items whose prices are compiled without any modification.
It shows that inflation is still above 9% in almost each of the 50 largest American cities. 11% in New York, Los Angeles and Chicago. 13% in San Francisco.
The reason being that the official figures are notably distorted thanks to the “quality effect”. This accounting twist artificially lowers the price of products whose performance increases. For example, a PC costs 50 euros in the imaginary world of national statistical institutes.
Another scam is the weighting of different products in the typical housewife’s basket. For example, in the United States, food only represents 13% of the basket. Energy (electricity, gasoline, etc.) only represents 7%. Better yet, according to the U.S. Bureau of Labor Statistics (BLS), Americans spend just 0.50% of their income on health insurance…
Another formidable artifice: the “substitution effect”. The stratagem is to modify the weighting of the different products in the basket. For example, if the price of beef increases and people choose to buy chicken instead. The weight of chicken will increase while that of beef will decrease.
The inevitable inflation
The distortion of reality began in 1983 across the Atlantic, at a time of galloping inflation (second oil shock). Since then, the BLS has tampered with its calculations to slow down the increase in retirement pensions which are indexed to inflation.
Too bad for the boomers who benefited well, some would say. However, salary increases are generally also indexed to the CPI…
That said, there are no miracles. False inflation figures obscure reality, but are not the cause of impoverishment. The decline in living standards is linked to the decline in productivity.
What explains the drop in productivity? Certainly energy scarcity, as well as the lack of technological breakthrough allowing us to produce more with less.
In any case, the result is public deficits which will be paid off by more debt (more money printing), which will have a ratchet effect on inflation.
As the research director of Natixis this week :
“In the pessimistic scenario of weak productivity growth in the euro zone, growth will be insufficient […] to visibly reduce the public deficit […]. To avoid the return of a public debt sustainability crisis, the ECB could then be forced to reopen Quantitative Easing. »
In short, inflation is much higher than announced. It should even get worse given geopolitical tensions. Sources close to the Iraqi government have declared has Russia Today that the country of two rivers could reduce its oil production by a million barrels per day.
And since inflation always starts with a rise in energy prices, there is cause for concern. We are living in a very inflationary pivotal time. It’s time to protect your savings by investing in bitcoin.
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