Sage Investment Club

We all know that inflation has been well above the Federal Reserve’s target rate of 2% for nearly two years now.It peaked at over 9% last June and has remained stubbornly high since then.But it seems like the bureaucrats have finally found a way to reduce inflation.No, it has nothing to do with reducing regulations, cutting taxes, and re-embracing capitalism.The bold solution that our courageous policymakers have come up with is to change the way inflation is calculated. So rather than actually stop the destructive things they’re doing that are actually causing inflation, they’re simply inventing a new way of calculating it. It’s genius!!The US Bureau of Labor Statistics (BLS) announced that, beginning this month, they will calculate the Consumer Price Index (the CPI, which is one of the key benchmarks of inflation) in a different manner..But they’ve actually provided very little information about how they’re going to do that (and nothing builds confidence more than a total lack of transparency).One small detail that we do know is that they’re only going to us one year’s of consumer expenses to calculate long-term average price weights.But they don’t give us any more information than that.For example, will they use average or median consumer expenditures for the year? Will they weight the first three months of the year, which had low inflation, higher than the final nine months of 2021?Without more information, we can’t know exactly how the changes will affect inflation numbers.But it’s a safe bet that they’ll choose weights which make inflation appear lower on paper.This tactic of “moving the goalposts” to achieve the outcome they are looking for is becoming something of a trend…Last year, the United States experienced two consecutive quarters in which the economy shrunk.This has long been the standard criteria to define a recession in practically every corner on earth.But the White House conveniently argued in July 2022 that this method is “neither the official definition nor the way economists evaluate the state of the business cycle.”Instead, the US government says that the “designation of a recession is the province of a committee of experts…”Perfect! Who needs clear, unchanging definitions of words when we have experts to make up new standards on the fly? And when have the experts ever been wrong before?They also did this during the pandemic, when Lord Protector Fauci refused to define what ‘herd immunity’ meant, or give any specific measure that would tell us we could take off the masks.But when it comes to inflation, we don’t need the “experts” to tell us that it is driving up costs. We all know this when we go to the grocery store, look at home listings, and fill up the gas tank or oil burner.And we’ve discussed the reasons for this on many occasions.There are extremely inflationary forces at work that didn’t exist for decades.For example, the world has been in a state of relative peace for quite some time. For decades there were no major wars, and most countries were happy to trade and get along.But that’s no longer the case. We’re involved in a proxy war in Ukraine, and China has ramped up its divisive rhetoric.Conflict is inflationary. Conflict makes it harder to trade among nations. It means countries become insular and impose sanctions and tariffs instead of opening up for business.You don’t need a PhD in economics to understand that will lead to higher costs.Another factor is that, for a long time, the manufacture of American consumer goods such as clothes and electronics trended cheaper, creating higher profit margins. And that savings was passed on to consumers.But those days are done.Slowly, as China’s economy grew, it was no longer so cheap to offshore manufacturing there. So the US moved to Indonesia, then Vietnam, and now Bangladesh… each of which saw its own economic growth.Now there’s nowhere left to turn to make cheap stuff. Instead, there is an on-shoring movement to bring manufacturing back to the United States and Europe. That is obviously going to be inflationary.Energy prices are another huge driver of inflation. History is clear that it is not just about cheap prices, but the return on energy invested. The more energy it takes to produce more energy— whether that’s hydrocarbons, solar, or whatever— the less return there is on energy invested.And like reduced profits, that means there is less energy leftover to grow.But not only are we having to drill deeper and explore harder to find new sources of energy. The investment to do so has been choked out by governments and environmental fanatics who demonize the entire industry.And with all these headwinds, the US government is still borrowing well over $1 trillion a year to fund its deficit spending.So despite the celebration over a couple months of inflation trending downwards, it is disingenuous for the “experts” to claim that inflation is falling, and the worst is behind us.In mid-2021, at the beginning of this inflationary period, I wrote that inflation is not a passing fad that’s here one day and gone the next. It is a long-term phenomenon. Some months it will be higher, some months it will be lower. Some years it will be higher, some years it will be lower.But over the long-term, inflation will continue driving prices higher, and making people less prosperous.I’m not saying there will be hyperinflation. But the unprecedented last couple of decades of sub-2% inflation are likely gone.At this point, if inflation drops to, say, 4.5% we will likely see victory celebrations from the Fed and US government.But regardless, it makes it pretty hard to trust their numbers when they just go and change the way it’s calculated.And that is why the official inflation numbers should have little bearing on the decisions you make.You are far more equipped than a room full of experts to figure out how big a problem inflation is to you. Just walk down the aisles at your local store.And if you determine that inflation is a problem, consider taking refuge in real assets.Throughout history whenever inflation hits, it’s almost invariably been a good idea to have direct ownership of an asset that cannot be conjured out of thin air by a central bank.Real assets include things like productive land, shares of a well-managed private business, or physical gold and silver.Most people don’t have an easy opportunity to buy productive land or shares of a well-managed private business.But gold and silver are totally within reach.Yet despite the highest inflation in decades last year, gold was pretty flat.Now it is starting to tick up, but is still about $150 dollars off its all time high of around $2,060 per ounce in 2020.And silver costs less than half the price of its all time high of around $50.But the reason to buy precious metals is not price speculation.Short term, there are many different factors that drive the price, and it does not align perfectly with inflation. But it is driven by supply— which is relatively constrained— and demand— which is largely driven by central banks buying boatloads of gold, not retail investors buying coins.Gold isn’t going to shoot to the moon like meme stocks or DogeCoin.But long term, gold has been the best protection against inflation throughout history.

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