Common Cents & How I Quit Worrying and Learned to Love Inflation

If the number of questions I have received on the subject are any indication, people are extremely concerned about the sheer volume of debt Washington keeps amassing. At some point, something will have to give, right? We can’t just keep borrowing money at the current pace forever, can we? Won’t this cause runaway inflation in the future?

Intuitively, wallpapering over problems with debt isn’t a sustainable long-term solution. However, as I told one person, worrying about the public debt crushing the economy is almost like agonizing over your own death. Yeah, it is out there, looming, but no one know for certain exactly when it will happen. So, as Andy Dufrense first said in “The Shawshank Redemption”: “Get busy living, or get busy dying.”

Don’t get me wrong, I am not as cavalier as that paragraph may imply. It is just been my experience people are more worried about ‘hyperinflation’ than the CPI running at, say, a 6-8% clip, or thereabouts. You know, the type of inflation when you need a wheelbarrow full of banknotes to purchase a loaf of bread. While extremely rare, it can happen, but it won’t in the United States in the foreseeable future.

Even so, what should you do when currencies fall apart and hyperinflation is running rampant?

The short answer is to get rid of your increasingly worthless cash. No, I don’t mean burning it or flushing it down the commode. I mean get rid of it by investing in or buying things which have some measure of intrinsic value. This can be any number of things, but the low-hanging fruit would be things like: silver, gold, commodities of any sort really, real estate, artwork, and other things for which there is a finite supply. However, you could, even should, include the stocks of companies which generate a substantial portion of their revenue outside the United States.

What you don’t want to do is ‘leave it in cash’ or buy most types of fixed income securities, period. While the kneejerk is to ‘hunker down and hang around’ when times get tough, any security with a stated interest rate will be a dead duck when/if inflation goes through the roof. It is nothing more than the math. And, yes, I would even include TIPS (Treasury Inflation protected securities) into the mix here. After all, IF the United States ever experiences hyperinflation, the Federal government won’t be in any position to service its debt. Further, it, Washington, would have been the cause of it.

But what of an increase in consumer prices of 5% over the next decade. Currently, the market(s) believe inflation will average around 2.2% over the next decade. Interestingly, that is the 30-year forecast as well. So, while 5% inflation would be well in excess of expectations, it isn’t an impossibility by any means.

But what would it mean? This heightened level of prices?

What if I were to tell you the absolute level of inflation is kind of irrelevant? For example, how would you answer the following question: “which is the better outcome? 10% inflation with 15% wage growth or 3% inflation with 5% wage growth?” What did you answer? Hopefully, the scenario where real wages grow at 5%.

Now, let me give you the secret skinny, if you will. The Consumer Price Index includes something called Owner-Equivalent Rent (OER). Put in other words, specifically words from blog.principal.com:


“…to derive OER, the Consumer Expenditure Survey, asks home owners, “If someone were to rent your home today, how much do you think it would rent for monthly, unfurnished, and without utilities?”

OER inflation tracks rents closely. The rub is that rental inflation doesn’t move around much, it’s “sticky.” The longer tenants stay in apartments, the less likely their rents increase. This lack of volatility hides significant cyclical movements in home prices…

…there is also a substitution effect, as rents increase, tenants switch to homeownership, leading to less demand for rental housing and lower rents. Long-term trends in OER and home prices are highly positively correlated. But, de-trended series are negatively correlated likely reflecting the substitution effect.”


In English? The OER is a big fat anchor in the middle of the CPI calculation, making up roughly 23-25% of the total. The housing bubble, when home prices went through the roof? The CPI didn’t really pick up on it, did it? No, it didn’t.

Further, there are all kinds of tricks of the trade, if you will. For instance, an old recipe for lasagna or spaghetti sauce will often call for a 16 oz. can of tomatoes. No big deal, unless you try to find one at the grocery store. Good luck with that. What you will find is 14.5 oz cans. The same can said of a half-gallon of ice cream. I believe only Blue Bell still considers 2 quarts to be a half-gallon, as most come 1.5 quarts to the half-gallon.

To be sure, there are others. However, there is a not so secret secret: the government doesn’t want to report high inflation because, drum roll please, COLAs (Cost of Living Adjustments) cost a lot of money. Hmm, conspiracy theory alert…conspiracy theory alert. However, is it really a conspiracy when everyone is complicit and it is so out in the open?

In the end, am I worried about inflation? Not really, because I know what we will do to protect our clients’ purchasing power, even grow it. I also strongly believe the official inflation gauges will understate true inflation in the future. So, taken together, there really isn’t anything to worry about, not really. Besides, worrying has never done me any good anyhow.

Take care, and have a great weekend.

John Norris

Chief Economist


As always, nothing in this newsletter should be considered or otherwise construed as an offer to buy or sell investment services or securities of any type. Any individual action you might take from reading this newsletter is at your own risk. My opinion, as those of our investment committee, are subject to change without notice. Finally, the opinions expressed herein are not necessarily those of the reset of the associates and/or shareholders of Oakworth Capital Bank or the official position of the company itself.