Posted by: Richard | February 1, 2010

On inflation

When I left London in 2002,  I could buy 9p beans at Sainsbury, 28p was the cost for a packet of crisps, a chocolate bar or a pack of gum at a corner shop.  In the pubs, £2.20 would get you a good pint, and many places would sell a lager at £1.85 or so.

Coming back in 2010, there has been a massive change in prices.  My cheapest pint (and also one of the best) was a pint of Sussex Best Bitter at £3.05.  Most regular pints run around £3.40.  Gum, crisps and chocolate are all around 55p.  My favorite music magazine (Uncut) has gone from £3.10 to £4.50.  Beans are now 45p at best.  Bus tickets have gone from 65p to £1.20 using an Oyster card or £2.00 paying cash.  I am not even going to go into the increased rental rates of property or petrol prices.

What is going on here?  We are repeatedly told that inflation is minor and remote, however there is overwhelming evidence that prices are in fact going up much faster than 2%-3% per year.  I think that inflation is not uniform, and we are seeing significant inflation in most goods except goods where the manufacturing has been moved to more competitive markets.  This means that CPI is not a good indicator of inflation, as it is being misled by a huge drop in labour costs and is this making us ignore what is right before our eyes. In effect, CPI is hte balance between “stuff”, which is dropping in price and commodities that are rising in value.

I think we may be in a situation where everything is actually inflating (food, minerals, oil, gas, water, land, equities and everything associated with the above) but this is being obscured by the fact that our “stuff” is being manufactured by people making $1/hour versus $15/hour?  If this is the case, at some point we will have moved all production to low-cost countries and we will start seeing regular inflation from the people making $1/hour wanting $1.10/hour next year.  If and when that day comes we may have to deal with 12% inflation of both “stuff” we want and the commodities that are core to our lives?

If we are living in a hidden inflationary age right now, what types of assets should I be holding to capitalize on future inflation?

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