“It’s the economy, stupid” was a phrase coined by James Carville in 1992, when he was advising Bill Clinton in his successful run for the White House.

In 1992, the United States was experiencing an economic recession, and the incumbent president, George H. W. Bush, was perceived as being out of touch with the needs of ordinary Americans. Carville told campaign staffers to hammer on the importance of the economy at every chance they got. He even went so far as to hang a sign in campaign headquarters reading, in part, “the economy, stupid.”

Today the issue is inflation. As with most topics that become political, there is a lot of misinformation, incomplete information or simply misunderstanding.

How experts measure the economy

The government uses several indexes to measure the economy. None of them are perfect, and they all measure different components of the economy.

One of the main measures economists use is the Consumer Price Index, or CPI, which measures the change in prices consumers pay for goods and services. The CPI reflects spending patterns for each of two population groups: all urban consumers and urban wage earners and clerical workers. The all urban consumer group represents about 93 percent of the total U.S. population.

As of March 2022, the CPI was up 8.5 percent from a year earlier before seasonal adjustment, the highest since 1981. Politicians blame the Ukraine war, supply-chain issues and COVID, among other factors. The simple explanation is just too much money chasing too few goods. The record amount of government spending over the past two years, combined with a decrease in energy production, is the root cause.

Another common measure of the economy is the PPI (Producer Price Index), which measures the average change over time in the selling prices received by domestic producers for their output. A third measure is the PCE (personal consumption expenditures price index, sometimes called the “PCE deflator.” PCE measures the prices that people living in the United States, or those buying on their behalf, pay for goods and services.

The inputs and methods to make these calculations are publicly available. There is not a conspiracy to dupe the American people in this regard. Whichever measure you use, every government measure of inflation is up. To see this, you don’t have to be an economist — just someone who shops!

Some people believe inflation is “transitory” and will be temporary. They point to core inflation, which is the change in the costs of goods and services, excluding those from the food and energy sectors because the prices of these items are much more volatile. Core inflation is up 6.4 percent versus a year ago, the highest since August 1982. There is a reason to exclude some prices when there are very special factors at play…but food and energy prices have been going up for more than a year.

Measuring the money supply

Economists also monitor measures of the money supply, including M1 and M2.

M1 is the money supply that is composed of currency, demand deposits and other liquid deposits, including savings deposits. M1 includes the most liquid portions of the money supply because it contains currency and assets that either are or can be converted to cash quickly.

In contrast, M2 is a broader money classification than M1 because it includes assets that are highly liquid but are not cash. Individuals and businesses typically don’t use savings deposits and other non-M1 components of M2 when they make purchases or pay bills but could convert them to cash relatively quickly. Economists like to include the more broadly defined definition for M2 when discussing the money supply because modern economies often involve transfers between different account types. For example, if you transfer $10,000 from a money market account to a checking account, the transfer increases M1 and keeps M2 stable because M2 contains money market accounts.

Just because more of the inflationary impact of the surging M2 measure of money (up more than 40 percent since the start of COVID) shows up in food and energy prices, or even used-car prices, isn’t a reason not to count them.

Shadowstats proponents inflate inflation even further

Some people claim that the government is grossly underestimating inflation and is hiding the scope of the problem. If you go online, you can see some people suggesting that if we used the pre-1980 methodology to measure inflation, it’s already running north of 15 percent. A website called Shadow Government Statistics presents the theory that the Bureau of Labor Statistics made a series of methodological changes in the 1980s and 1990s that have systematically understated the true rate of inflation. These Shadowstats proponents say the true inflation rate is 6 to 8 percentage points higher than the official statistics indicate.

Using pre-1980 numbers makes it appear that inflation has been running close to 10 percent per year, on average, since 2000. But if inflation really had been running close to 10 percent per year, the cost of goods and services would have gone up 800 percent since 2000. This simply hasn’t happened. In 2000, a gallon of milk cost $2.79, a Big Mac was $3.99 and the average new car cost $21,850. Today, milk does not cost $22 per gallon, a Big Mac does not cost $31 and the average new car is not $174,800. Moreover, if this methodology were a true measure of real GDP growth, the United States would have been in recession since 2000. This simply isn’t the case.

Whatever the actual number is, inflation is a big risk

Regardless of what the inflation number is, we believe inflation remains one of the biggest risks that people face in retirement — especially those who are on a fixed income. One challenge for retirees is stretching a fixed income to meet rapidly rising prices. Another is investing in a way that helps retirees keep pace with the higher cost of living.

Their income will not (by definition) keep up with rising costs. This is why it’s so important to continue to invest so you can grow assets, even once you are retired. People are living longer and doing more, so growing your wealth is critical. Just as the old rules for calculating inflation don’t make sense, old rules for investing don’t either. Today it’s important to allocate your portfolio based on both your current needs and your future needs, so you don’t outlive your money.

As we approach the midterm elections, we will hear more about inflation — because “it’s the economy, stupid.” One doesn’t have to be an economist to know prices are going up. Moreover, the important thing is not what the economic numbers say, but how you are personally impacted.

Our team is here to help you develop a long-term plan to meet your needs and wants today, while doing the same in the future. Smart investing is a dynamic and lifelong process. Feel free to reach out whenever we may be of service. Your vision is our priority, and your future is our mission.

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Randy Carver, CRPC^®, CDFA^®, is the president and founder of Carver Financial Services, Inc., and is also a registered principal with Raymond James Financial Services, Inc. Randy has more than 32 years of experience in the financial services business. Carver Financial Services, Inc,. was established in 1990 and is one of the largest independent financial services offices in the country, managing $2.2 billion in assets for clients globally, as of December 2021. Randy and his team work with individuals who are in financial transition as a result of divorce, retirement or the sale of a business. You may reach Randy at randy.carver@raymondjames.com.

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