Recently, the Devonshire Research Group released its study on the U.S. inflation rate titled Consensus of the Contrarians: The Alternate Macro Economic View. Ignoring “flawed” government models they estimated the Consumer Price Index, which was first used during WWI to adjust wage increases, annual inflation rate to be closer to 8% versus the generally accepted rate of 3%.
A wide variety of Price Indices are used to adjust for the effects of Inflation on the economy. These adjustments are widely applied to derive a number of common measures and underlie many critical economic and asset management concepts . . . Conclusion: These indices and concepts are intimately commingled which is leading to a wide ranging divergence between reality, published government statistics and the assumptions used for investment decisions.
A rising tide of Contrarians is arguing that Inflation is understated by the Price Indices chosen by U.S. government agencies in numerous ways for complex reasons . . . Conclusion: The Consensus of Contrarians is growing, shared across several independent critics and supported by concerns among many that official statistics paint on overly optimistic picture of the U.S. economy.
To the extent that the Contrarians are correct, the implications for the U.S. economy and for investors are profound . . . Conclusion: The Consensus of Contrarians suggests that many investors are using incorrect assumptions in their asset allocation models and investment decisions. Capital preservation is compromised, portfolio allocations are distorted and return performance is overstated. The broader effect on capital markets is likely profound and complicated.
For investors, inflation has a profound effect on expected returns since it impacts the estimated cost of capital. For consumers, inflation affects standard of living, making it “far more difficult for many Americans to maintain than published statistics suggest.” It also means that since the Consumer Price Index no longer tracks standard of living and out-of-pocket expenses, it is a poor benchmark for measuring salary increases, results in less purchasing power, and leads to lower quality of life. Who benefits? The study estimated that the U.S. government saved over $680 billion from 1996 to 2006 and understated the inflation rate to possibly use it as a policy lever.
See Devonshire Research Group’s report below for additional information.