How inflation indices indicate different impacts on consumers
The last article discussed how inflation can benefit the properly leveraged real estate investor. Now, let’s go deeper. I lead into every conversation regarding the benefits of inflation by asking investors what they think the current rate of inflation is. Often, I hear “two to three percent,” which is not really far off from “official” numbers. The Personal Consumption Expenditures Price Index (PCE) and the Consumer Price Index (CPI) are the most common indexes for inflation. Each of these refers to specific items that are measured and tracked by items that can be most controlled by The Federal Reserve monetary policy.
Each index is specific in its measurement and focus. The CPI is a statistical estimate constructed using the prices of a sample of representative items whose prices are collected periodically. The PCE price index is a narrower measure. It looks at the changing prices of goods and services purchased by consumers in the United States. It is similar to the Bureau of Labor Statistics’ consumer price index for urban consumers.
However, if we view inflation as a reduction in buying power, other indices have been created by economists that better illustrate the true change in cost of living for the average American. These consider a wider array of expenses that impact the consumer and how location effects expenses. For example, the PCE attempts to identify underlying inflation trends by excluding two categories: food and energy. However, food and energy are two significant necessities for all consumers! Two places I refer to are John Williams www.shadowstats.com and Ed Butowsky’s www.chapwoodindex.com for comprehensive data on inflation. Your eyes will be opened to the wizard behind the curtain and better understand how the placement of your investment capital is critical. The traditional options have not outpaced the true rate of inflation the way properly leveraged real estate has.
Review the articles starting September 2019. Although the current market is volatile, the real estate investor must stick with the basics and follow their plan. Times like these are when following a plan gets you ahead of those who don’t.
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(The author consulted Dr. John A. Abernathy.) The above information is the sole intellectual property of the author. Any distribution without written consent of the owner is strictly prohibited ©.