Like many here at the Money Weekend office, you probably found it hard to believe that Australia's core inflation was 'only' 1.8% for the year according to TD Securities, a company that compiles monthly inflation figures. However there's a big problem with these statistics. And that is the data is designed to show the lowest inflation number possible. Just because the statisticians at TD securities tell you the price of things hasn't risen much doesn't mean it's true. Before we show you what we mean, let us assure you this isn't only happening in Australia. One US group - Shadow Government Statistics (or Shadow Stats) - thinks inflation numbers are a joke. In fact, it thinks the whole purpose of reporting inflation figures has changed. Rather than being a measure of the cost of living, it's about the US government reporting the lowest inflation number possible. In this article, we'll show you why you can't trust these statistics, who you can trust, and how to minimise the impact inflation has on your purchasing power. Creative Government Accounting Back when Alan Greenspan was at the centre of the universe - ahem, the US Federal Reserve Bank chairman - he was extremely critical of how the Consumer Price Index (CPI) overstated inflation. Greenspan's argument was that if the cost of lamb rose too high, consumers would switch to buying a cheaper meat, like beef. So Greenspan wanted to switch the consumer price index (CPI) from a fixed basket of goods to a substitution-based basket of goods. He basically created a CPI that opted for the cheaper item when two choices were possible. But after a few years of using that method, inflation still wasn't low enough for him. He had a better idea. And this is when 'core' inflation became mainstream. Basically, core inflation only measures certain things. It includes housing costs, clothing, holiday and travel expenses, alcohol and tobacco. And it's all about making things look cheaper on paper. If you remove expensive items like food and energy costs, you've got the lower number of 'core inflation'. But the thing is, when the consumer price index was first developed, the idea was to measure the actual cost of living, not the lowest theoretical cost of living if you purchased certain items. The developer of Shadow Government Statistics in America - John Williams - calculates US inflation using a fixed basket of goods. His method is more like the original method developed after World War II ended. (Unfortunately we can't find anyone who does the same in Australia.) The numbers Williams produces differ drastically from what the US government is telling its citizens. Williams estimates that actual US inflation is running at 11.5%. That's four times what the Fed is telling people. Actual US inflation vs. Official US inflation Source: Shadowstats.com You can see the divergence between the official US Bureau of Labor Statistics (red line) and the Shadow Government Statistics (blue line). In 1982, official inflation figures dropped after the substitution-based measurement system was introduced. And again, the divergence grew larger when core inflation was introduced in the mid nineties. The problem is, the inflation data provided by the US government does not match the consumer experience. Consumers aren't stupid. We can see the price of goods and services rising. We know how much things cost. How to Protect Yourself From Inflation Just remember, America isn't unique in how it measures the cost of living. Our government does the same here in Australia. For the past decade we have used a substitution-based method. It's also more common to see core inflation quoted in the media rather than headline inflation. Headline inflation includes food and energy costs, while core inflation doesn't. And even though you probably already know the inflation numbers are a furphy when they hit the nightly news, you think there's not much you can do about it, right? Wrong. You can never really protect yourself from inflation - or government deception, but that's another Money Weekend - but you can minimise its impact. Basically, inflation eats into your purchasing power. As inflation rises, your purchasing power erodes. So if you want to 'beat' inflation, the aim of the game is to make a return on your money big enough to keep up with, or exceed the real rate of inflation. It seems unfair. Making money to break even. But if the ABS is right - and inflation is up 19% today from what it was in 2006 - it would mean that $1,000 in 2006 would buy roughly the same amount as $1190 would today. Put another way, $1000 from 2006 would only be worth $840 today. It means a loaf of bread might have gone from $2.50 to $2.99... Or stamps from 50 cents to 60 cents... So how can you limit the impact of inflation? For now, the simplest option seems to be a good old-fashioned bank account. Say you put $1000 in the bank back in 2006. For the past six years, the average Aussie bank deposit rate has been 4.53%. If you compounded that figure you would've earned $304.5 in interest payments on your $1000. That means you would've managed to keep your cash from losing all its purchasing power ($190) and made a little extra ($114.50) along the way. Not bad. You've basically broken even. And then of course there's gold... We've written about gold many times here at Money Morning. So we won't go into the full argument here again. Just consider this: in 2006 gold was selling for around AUD$800 an ounce. Last night it closed at AUD$1574. That's a 96.75% increase in six years. An increase like that would have put you well in front of the inflation rate. (Although, you'd have a pretty hard time buying your groceries with shavings off your gold bullion bars.) The point is, there's no point hoarding your money under the mattress. When you're only in cash, your buying power will rot away. Even if you stuff $1 million under there, in six years time it might only be worth $840,000. In 20 years' time it might only be worth $10,000. How would you get through retirement on the equivalent of $10,000 worth of buying power? You need to do something to keep ahead of inflation. At worst, stick some cash in the bank. But if you want to do more than break even, you need to do more. Shae Smith Editor, Money Weekend
A bottle of gas, you know the big one about 4 foot high: WAS $130 about 2 months ago, NOW: $145. I'll do the math, that's an increase of 11.53%!!!!! That's pretty much in line with that guy in the States conclusion. And that's only been for a few months. My prediction: If you eat it, heat it, cool it, drive it, smoke it, sniff it, root it, vote for it, raise it, wear it, burn it - then before the year is out it will cost 10% more to fuel it. But, according to the RBA, our inflation rate is on track at about 2-3%. ??? Go figure. Edit to add: forgot to ring the gasman before we ran out of gas. Cold showers tonight brrrrrrrr
that's what i've been saying all along as well. The RBA are a bunch of turds and their so-called inflation rate is a croc of sh1t! With many of the things you mention - especially goods and services where government has its thieving hands in - i'd have to say that annual inflation is closer to between 15 and 20%. electricity and rates are two good examples, although with the carbon tax coming in you can count on electricity price increases over the next 12 months of 20 to 30%. thanks to all the numnutz - like BigAD - who made that bit of ingenius legislation possible!!
In other word this will spell the end of consumerism, back to welfarism and life ruled by the Pigs. Orwell [Genius]
Did they ? is it still that high ? my car is lpg aswell. If its still up that means the cap is off it .Im sure the government had a cap on lpg until 2012 if the prices have stayed up it must be finished , I had this conversation a couple of years ago with a friend & we both concluded it would rise like that when the cap finished Ive been os for 10 months now i wouldnt have known this until i got back . Thanks roman see you are good for something i dont care what the others say :
So .... For the past 12 months .... Core inflation: 1.8% Broad Money growth: 7.8% One of these 2 is not like the other One of these 2 is a lagging indicator
1.8% inflation. wow another beaut straight from the office. Energy, food, transport,ping pong balls,etc have all gone up ! & Real Estate, Share Market, have gone down. you than add the pluses and minus the minuses and you end up with 1.8% ! - This is like a financial/political rape orgy on the unsuspecting masses. Our day to day costs have become ( are becoming ) dearer but our nest eggs ( RE & ASX) are now worth less. And than they come out and quote something like 1.8%
Broad Money Growth has averaged above 10% for the better part of the past 2 decades yet inflation has averaged below 3% for most of that time....... One of these two is not like the other = correct One of these two is a lagging indicator = Wrong......... When the Core inflation is a doctored bullshit side show, it will not lag anything.......It is a farce that needs to be abolished. The masses need to be woken up to this before anything else. As soon as Australians demand REAL inflation figures, the political landscape will change.
Maaaaaaaaaaaaan, as I have said in previous posts, everything is going up in Ireland. Everything except of housing prices, and that, THAT is the sole reason, government was trying to BS us that we experienced massive deflation everywhere, which simply is not true. Housing bubble popped, so it is obvious that price will drop, other than that everything went steadily up, except of wages obviously.
^^^^ Yep, and it's only going to get worse. Here in "the lucky country" we're busy selling off the farm ( literally, to china); yet one more decision that is bound to bite us in the ass in the future).
"But if you want to do more than break even, you need to do more". So says the article. But other than gold and property (were rents can be raised), how else can you "beat" inflation???
