Published February 08, 2013

When Beating Inflation Isn’t Enough

Dear Reader,

Vedran Vuk here, filling in for David Galland. First today, I'll discuss why our own experiences with prices often differ from the official inflation numbers – it doesn't require one being a conspiracy theorist or some sort of nut. Also in the article, I'll reveal the results of our reader inflation poll from a few weeks back.  Make sure to check out Dennis Miller's article on those same results over at Miller's Money Weekly. And last, Dennis will relate a story from his mentor Glen Kirsch on the importance of holding gold. Now, let's start with inflation…

I Beat Inflation, so Why Do I Feel Poorer?

By Vedran Vuk

Regardless of the inflation statistic cited in our articles, someone always gets upset. For example, when Dennis Miller recently reported inflation figures from Shadowstats being as high as 9.6%, a few readers blasted  them. After all, the Bureau of Labor Statistics (BLS) has inflation only at 1.7%, right? Yet at the same time, plenty of readers think that the Shadowstats numbers are right on. In fact, we recently took a survey of readers from Miller's Money Weekly and the Casey Daily Dispatch to see how much their expenses had increased in the past year. Most readers saw inflation much higher than the official rate. Here are the results:

The weighted average inflation rate of the responses came out to 8.07%. Now, here's the question: Are our readers crazy? I mean that seriously. How is it possible that 23.6% of our readers think their prices rose over 11% last year, while it's also fairly common to find folks who believe the official 1.7% number (though there were few respondents in our poll.)?

The answer is that we're not going nuts. I believe that our readers are experiencing higher prices. But is the real inflation rate 8.07%? Not necessarily. So how do we reconcile these experiences of higher prices with the official inflation reports? Do we immediately cry, "Conspiracy!" That is one way of answering this conundrum, but another answer is found in the way the BLS calculates inflation. The BLS's basket of goods is supposed to show prices for the representative consumer. The problem is that most of us don't spend money like the representative consumer. In fact, it would be a miracle if your expenditures exactly matched the BLS numbers.

Let's see a few examples of the problem. According to the BLS's methodology, nursing homes and adult day services make up only 0.135% of the Consumer Price Index (CPI). College tuition and fees make up only 1.695%. Cigarettes are just 0.744%. When looking at the aggregate of the whole market, these allocations might make sense. Most of us don't smoke or go to college or pay for a nursing home. So in some sense, the BLS's low allocations seem reasonable.

However, the people who do pay for those items allocate much greater proportions of their income to them. If you're paying for a nursing home for a loved one, I can guarantee that you're paying way more than 0.135% of your annual expenditure. In fact, it's likely one of your major expenses. The same goes for college tuition. I finished a master's degree in finance last year. Let me tell you, the tuition wasn't 1.695% of my expenditures… oh, how I wish it was. And even the smoker allocation doesn't make sense. Assuming a pack a day at $5 per pack for a seasoned smoker, that's $1,825 per year. For that to equal 0.744% of your expenditures, you would have to spend $245,296 per year. The cigarette allocation makes sense for only the richest cigarette smokers.

In reality, these categories are much larger allocations for many consumers. As a result, skyrocketing prices in a few categories can severely impact purchasers of these items while barely affecting the overall CPI inflation rate. For example, the nursing-home category rose 3.6% last year; college tuition and fees rose 4.0%; and cigarettes rose 1.9%. In all three cases, costs are rising faster than the official inflation rate – over twice as fast in the case of nursing homes and college tuition.

If your expenditures are heavily allocated to these categories, your personal expenses are rapidly rising while the official inflation rate remains tame. To some extent, all consumers' expenditures will differ from the BLS number. It's entirely possible that the CPI might actually be 1.7%, but that your personal expenses are up 4% or 5% for that year.

This can make investing particularly difficult, because beating inflation isn't a guarantee of keeping up with your personal expenses. If your bonds earned 3% last year, though they beat inflation, you are actually worse off if your personal expenses rose by 4%. The BLS figures are an imperfect attempt to calculate inflation; it is not an infallible number which represents everyone's personal price increases. How much your costs increased really depends on your personal spending patterns.

To stay ahead of prices, you have to invest based on expected price increases for your personal expenditures rather than the CPI inflation rate. For many of us, this can be particularly difficult to do, as future expenses are hard to predict. However, there are a few cases where one can forecast future price increases. For example, if you're approaching retirement, you can bet that healthcare costs are going to be a very important of your expenditures and will continue to rise much faster than inflation. As a result, you need to invest with those expectations in mind. If you're a New York City renter, you can pretty much bet on higher prices going forward and rising faster than inflation. Or, if you have several children ready to enter college, you're going to need to do better than beat the CPI to maintain the purchasing power of their college savings.

Finding good investments isn't about beating the inflation rate; it's about beating the price increase on your personal purchases. Given that it's very difficult to predict those price increases, my advice would be never to just meet the official inflation numbers – make sure to overshoot them. The official inflation rate is not the right benchmark for every consumer.

For those searching for a way to make a little extra yield to keep up with their rising costs, we've got plenty of options in our portfolio at Miller's Money Forever, from a company yielding 5.2% to our latest addition, a REIT which just raised its dividend by 5% and pays a 4.4% yield. For those picks plus a lot of advice on planning for the costs of retirement, try out a subscription today. Now, I'll turn it over to the editor of Money Forever, Dennis Miller.

Why Do They Call Gold "Precious" Metal?

By Dennis Miller, editor of Miller's Money Forever

One of the biggest surprises I had when I joined the Casey team was the number of folks who asked me if I was one of those "gold nuts," or something to that effect. Well, I own enough metal to be comfortable, but I never looked at myself in that fashion before. It made me reflect on why I bought both gold and silver.

In my book Retirement Reboot, I wrote extensively about a wonderful mentor, the late Glen Kirsch of Asset Strategies International. In an early discussion about owning gold and silver, Glen told me an unforgettable story.

His first job out of college was sitting in a hangar on the West coast helping to process Vietnamese refugees. Basically they fled their country and came to the US with their "little bag of gold" to start their lives over in their new country. His job was to give them a fair exchange in US dollars. He also said one of the toughest things he had to do was tell people with suitcases of Vietnamese currency that it was worthless. Glen's point was everyone should have "core holdings" – a personal little bag of gold in case they ever found themselves in a similar situation.

I can attest to the fact that if you tell that story to ten people as justification as to why they should own some gold or silver, eight will look at you and wonder if you are borderline insane. "Come on Miller, flee the country? That will never happen. I mean, are Americans ever going to get in a boat and flee to Cuba? Are you nuts?" Geesh!

It has been over 20 years since Glen shared that story, and now I find myself in the position of people asking my advice. In effect they are saying, "OK, I should own some metal; where do I start?" What I have come to realize is there are a myriad of reasons to own both gold and silver, and it depends on exactly what you are trying to insure against.

A step-by-step process

Glen started with inflation – a way of life around the globe these days. Paper currencies are certainly going down in value. What happens if the currency in your country collapses? In the last few years we have seen currencies in Zimbabwe collapse, and other countries like Argentina on the way there as well. What do their citizens, ordinary people like you and me, use for money when that happens?

  1. Make sure you have enough to live day to day. Having listened to lectures and talking with a few folks who have lived through those events, I was surprised when they said gold was of no practical value in day-to-day living. Things became a system of barter.

    If gold holds its buying power as it has historically done, using it to buy groceries would make no sense. If you would buy your groceries with a one-oz. gold piece, you would then get your change in a wheelbarrow full of worthless paper money that you do not want. Using today's values, gold is worth almost $1,700/oz. Most of us would not buy anything close to that amount of groceries in one visit to the store; therefore, we would end up with a whole lot of change if the merchant accepted our coin to begin with.

    Glen's first suggestion is to buy "junk silver," which is circulated silver dimes, quarters, and half dollars. With a few exceptions, they are coins minted before 1965. The idea is that silver will also hold its value, but is denominated in smaller amounts and could easily be used for day-to-day purchases and barter. That is where I advise people to start accumulating their metal.
  1. Protect your nest egg. I attended a Casey Research Summit in Arizona in 2011. A speaker from Austria was discussing hyperinflation in his country and put up a chart that said, "On average, every 1.4 days prices doubled." If one has one's nest egg in a certificate of deposit (CD), long-term bond, or some type of investment that is not redeemable (or just plain cash), we calculated that it would take less than a month and the entire amount would be virtually worthless. Your wealth would vanish almost overnight.

    Even today we're experiencing a similar slow eating away of our purchasing power.

    I got my first Social Security check in 2002. Assuming it was originally $1,000 and adjusted annually by government's official inflation numbers, today that check would be $1,315 as shown on the black line. The green line shows the purchasing power of that $1,315 in terms of 2002 dollars from ten years ago, which is equivalent to $1,000.

    At the same time, renowned economist John Williams outlines what the inflation rate is based on the way the federal government used to calculate it. The red line represents the buying power of our Social Security check using the old BLS methodology. The bottom line is simple: Based on Shadowstats' calculations, today your Social Security check should buy 47.7% of what it did a decade ago.

    As Vedran said, whenever we mention an alternate inflation number, some readers take issue with it. All we can say is that our subscribers told us their number was 8.07% in the poll, so apparently someone out there is experiencing higher prices than the official rate.

    The orange line on the chart shows the price of gold since 2002. In December 2002, an ounce of gold cost $318. With $1,000, one could have bought 3.15 ounces. Today that same gold will cost $5,258. It is evident that over the last decade, those who own gold have not only kept up with inflation, but also seen their true buying power increase. Both gold and silver are true hedges against inflation.
  1. Protect yourself from the government. While some may scoff at the idea of having to flee the country (approximately 1,800 people renounced their citizenship in 2012), it may be more prudent to discuss the idea of the government confiscating gold.

    The precedent has been set by Roosevelt during the Depression. In round numbers, he called in all the gold and paid the citizens $20/oz. Once he had it all in the hands of the government, he then declared that the value of gold was $35.00/oz. Most would agree they would much prefer to not have their nest egg devalued by such a sudden and capricious political act. They would prefer to hold their gold and if they were to sell it, to do so at the current higher market price.

This brings us to the next issues with ownership of both gold and silver – portability and location. If one wants to insure their nest egg from a confiscatory government or one can see any remote possibility of wanting to leave the country in the future, owning precious metals outside of one's home country makes perfect sense. One of the best ways to do so is to use the Hard Assets Alliance. It helps us to buy gold and silver at the best prices available in the market and then store them in a number of secure locations throughout the world. In the spirit of full disclosure, Casey Research is one of the founders of the company. Visit the HAA website for more information.

Gold and silver are a recognized value worldwide. An ounce of gold or silver is worth the same from Argentina to Zimbabwe. It is a universal currency.

There are just a few reasons why savvy investors buy metals. In smaller denominations, it can serve as an excellent form of barter if your home currency collapses. It is has held its buying power through all levels of inflation throughout the world. Gold and silver are accepted throughout the world at the current market price. And finally, should one want to relocate, having gold and silver in a country other than home can certainly facilitate the process. I would not want to run the risk of trying to explain to customs agents or the Department of Homeland Security why I want to take several ounces of gold and silver with me on an international flight. I shudder to think what would happen if people got caught trying to sneak it outside the country.

When people ask me how much metal they should accumulate for each purpose, I tell them they need to accumulate enough so they are comfortable that they have the potential threat covered. In other words, you want to have enough to do the job. I also suggest following the advice of other Casey Research editors who specialize in precious metals, such Louis James and Jeff Clark.

Why would people think that folks who have strong feelings about gold and silver are nuts? My answer to that is they see no need to have them; they cannot relate to the examples of Argentina, Zimbabwe, and the Vietnam refugees. My early mistake was using an example that most people could not relate with. Now I start with the facts – something people know to be true. We have high inflation, it is getting higher, and our government is not telling us the truth.

I read recently that the Federal Reserve was established 100 years ago. Since that time, the US dollar has lost 95% of its buying power. Paper currency is just that: a paper IOU from a government that is decreed by the ruling class to be worth something. History has proven time and time again that governments cannot control themselves and will eventually devalue that paper to the point of being worthless. Only gold and silver have held their value through thousands of years, seen hundreds of governments rise and fall, and hundreds of currencies collapse.

For thousands of years, no government in the history of man has been capable of replacing its everlasting value with its current flavor of paper money. Gold is still considered the ultimate value and hedge against inflation throughout the entire world. A one-ounce gold or silver coin is recognizable value, no matter what country you may happen to be in. I agree with Glen – everyone should have a "little bag of gold." It is the best insurance you can buy. It always has been and always will be.

Perhaps that is why they call it a "precious" metal.

Friday Funnies


1. Light travels faster than sound. This is why some people appear bright until you hear them speak.

2. A fine is a tax for doing wrong. A tax is a fine for doing well.

3. He who laughs last, thinks slowest.

4. A day without sunshine is like, well, night.

5. Change is inevitable, except from a vending machine.

6. Those who live by the sword get shot by those who don't.

7. Nothing is foolproof to a sufficiently talented fool.

8. The 50-50-90 rule: Any time you have a 50-50 chance of getting something right, there's a 90% probability you'll get it wrong.

9. It is said that if you line up all the cars in the world end to end, someone from California would be stupid enough to try to pass them.

10. If the shoe fits, get another one just like it.

11. The things that come to those who wait may be the things left by those who got there first.

12. Give a man a fish and he will eat for a day. Teach a man to fish and he will sit in a boat all day drinking beer.

13. Flashlight: A case for holding dead batteries.

14. God gave you toes as a device for finding furniture in the dark.

15. When you go into court, you are putting yourself in the hands of twelve people who weren't smart enough to get out of jury duty.

That's it for today. David Galland should be back next week. Thank you for reading and subscribing to the Casey Daily Dispatch.

Vedran Vuk
Casey Senior Analyst