How Low Is Inflation?

The U.S. Bureau of Labor Statistics (BLS) says inflation is low, with the Consumer Price Index (CPI) hovering just below 2%.  But the MIT Billion Prices Project, which tracks the prices of many goods and services sold online, says inflation is over 8%.

Others, like John Williams of Shadow Stats, who used to work for the BLS, track inflation using the old formula that the U.S. government used to use (a fixed basket of goods and services). Williams says inflation is closer to 8% per year as well. And his formula deserves respect because the BLS has changed its inflation-calculation formula more than 20 times since 1980, mainly due to political reasons—to avoid paying higher cost-of-living adjustments (COLA) to people on Social Security and government pension programs. Unfortunately, there are even more inflation-formula changes planned for the near future.

Even the former head of the BLS, Keith Hall, has recently admitted the BLS is underreporting inflation.

Unfortunately, inflation is most likely only going to get worse as global central banks flood capital markets with more easy money from stimulus and quantitative easing (QE) programs. Inflation is a stealth tax, but it doesn’t destroy collective wealth. It merely transfers it from one group to another.

Build Your Wealth In “Preflation” Era

With the right types of investments, you can build your wealth in this era of “Preflation.” Holding companies with low debt and little exposure to commodity costs is a terrific insurance policy against inflation. While commodity producers generally fall into that category, companies which have strong pricing power in their markets are also excellent candidates as inflation fighters.

Vanguard Dividend Appreciation Index

While Vanguard Dividend Appreciation Index’s (NYSE: VIG) doesn’t disclose the precise methodology used with the fund, Vanguard holdings show superior revenue growth relative to their peers. They have also increased their dividends in each of the last ten years, a period which has included a major recession and a spike in commodity costs. As a result, the fund’s holdings have clearly demonstrated that they are able to push through cost increases when necessary.

The average stock in the fund’s portfolio tends to command a lower price-to-earnings multiple than the S&P 500, while having higher historical sales and earnings growth.  The fund’s constituents also have lower payout ratios and clean balance sheets. As a result, the ETF strikes an excellent balance between growth and value investing, while ensuring that its holdings pay growing and sustainable dividends.