Is anyone else having deja vu?
In 1973, the U.S. economy had:
- Record oil prices (check).
- A stock market crash (check).
- And jaw-dropping inflation (check).
Sound familiar? Yep, brush off your bellbottoms. The 70s are back.
And soon even Bernanke's shell games won't be able to hide the truth. After years of the Fed's loose money policy, inflation is biting back. And it's going to get ugly.
The government could stop inflation in its tracks if it would make some hard decisions. But if it doesn't, there are still proven ways to protect yourself from inflation. (For specific anti-inflation recommendations, take a look at the latest Money Morning special presentation right here.)
Learn more below.
"Core Inflation" Lies, Consumer Prices Don't
Rising prices are hitting U.S. consumers a lot harder than the U.S. Federal Reserve - or the U.S. government - would have us believe. The government-issued consumer price index (CPI) is showing that "core inflation" - which includes prices for all items except food and energy - was up only 1% from last year.
By excluding food and energy prices, as volatile as they may be, the CPI fails to convey the pain that rising prices are inflicting on American households. Indeed, the true rate of inflation could be closer to 12%.
The CPI is a joke. Every American knows that in reality inflation is far higher than the CPI tells us based on what they feel in their wallets every day.
Our research suggests inflation is really running between 9% and 12%, which is more commensurate with what we all feel in our wallets every day.
Inflation is very real, and it's already here - despite what those in Washington continue to believe ... either because their data is so heavily manipulated or because of their own deliberate ignorance. And using history as our guide, it's going to get a lot worse before it gets better.
What's Driving Inflation?
There are a few factors, but the single-most-important contributor to high inflation right now is the trillions of dollars central bankers around the world have pumped into the financial system since the crisis began in late 2007. Never mind that the crisis was caused by too much money to begin with; the central bankers have embarked on a course that ultimately risks destroying the very wealth they are trying to preserve.
Granted, 99% of Americans won't see or believe that because the markets have rebounded significantly as part of the reflation process. But they will definitely feel it.
The only reason we've been able to stave off complete inflationary disaster so far is that we've exported it to places like China, India and Brazil as part of our monetary policy, in exchange for the cheap goods we've come to depend on. However, that's coming to an end as those economies grow and begin to struggle with inflationary pressures of their own.
Eventually, inflation will come full circle and when there is no place else for us to export it, there's going to be hell to pay.
Middle East Uncertainty
Inflation was already well under way before the powder keg in the Middle East exploded, so rising oil prices are not as much a primary inflation driver as most people think. That's not to dismiss it, because there is a direct relationship between scarcity and higher prices especially at the consumer level.
The key is time - and by that I mean how fast prices climb and how long they stay at elevated levels.
Most companies are prepared to absorb short-term volatility. But longer-term, there is no doubt they'll pass along to consumers (you and me) the higher fuel and petroleum costs that are part of their manufacturing processes. Many, like airline and transportation companies, are already doing so. So are food suppliers and materials makers, for example.
Why The Government Lies About the Real Inflation Rate
The government has strong motives for masking the real inflation rate.
Here are three:
- Political Gain: This should surprise no one given the self-serving attitude that permeates Washington. Elected leaders know positive economic news, such as inflation that's under control, sound good in campaign speeches and can make the difference in a close election. In non-election years, fudging numbers like the CPI serves to avoid public pressure to do something to fix it. Government statistics that show inflation is not a problem keeps the issue off the public radar, regardless of the reality.
- Big Savings: Many government entitlements, most notably Social Security payments, are linked to the CPI. Lower official numbers mean lower payouts. The ploy has saved the debt-ridden U.S. government billions of dollars, but has taken money from the pockets of American citizens. Williams says Social Security payments would be twice as high each month if the CPI formula had never been changed. It's no wonder so many seniors struggle to make ends meet. And it could get worse. Last fall's debt super committee suggested basing Social Security increases on a variant of the CPI that would lower payments even more.
- Keeping Interest Rates Low: Although not responsible for the CPI, the Fed prefers it stay as low as possible to obscure its own inflationary policies. Fed policies like quantitative easing and holding interest rates near zero should have pushed inflation much higher - but the CPI's mutant methodology made sure that didn't happen. If the CPI were reported accurately, the Fed would be forced to raise interest rates, which in turn would slow the economy and slam the stock markets. That's not a headache the Fed or the elected leaders in Washington want. (And then there's the bonus of allowing inflation to devalue the dollar to help reduce the nation's $15 trillion debt burden.)
How to Fight Inflation
Remember, chaos is actually opportunity in disguise. Washington is creating chaos - but from that we'll see many wealth-building opportunities arise.
For investors, the key thing to do in the years to come is to make investment choices that can weather the storm, and profit from the opportunities that emerge. Here are some very sound choices for turbulent times:
- Altria Group Inc (NYSE: MO): Altria is a giant cigarette producer with a 6.23% yield that's a smart choice in rough markets. You may not like smoking any more than I do, but t he firm's beta is a very low 0.47, which means the stock is slightly less than half as volatile as the broader markets. Operating margin is a healthy 39%.
- Ecopetrol SA (NYSE ADR: EC): Ecopetrol is a vertically integrated oil company that's based in Colombia. That makes it a play on Latin America's robust growth - with a nice 2.5% dividend, to boot. This stock has a beta of 1.01 - which means it's about as volatile as the overall markets. However, I'm willing to overlook that volatility, since the company's five-year Price/Earnings/Growth Rate (PEG) ratio is 0.53 which suggests there is still good value at a fair price.
- iShares Barclays TIPS Bond Fund (AMEX: TIP): This exchange-traded fund (ETF) invests exclusively in Treasury Inflation Protected Securities (TIPS). W hen inflation really blooms, so, too, will its share price. The yield is still 2.4%, which is not much in the scheme of things but given its ability to help hedge off rising prices, I'll take it.
- Money Map Report: The Money Map Report just released an excellent free resource for inflation investment ideas. Inside, you'll learn the reasons behind the struggling U.S. economy - and how to protect yourself from the fallout. You can find the special presentation right here.