The topics of inflation, deflation, and speculation of the Fed’s next move pretty much dominate our in-boxes on a daily basis. Our readers want to know who they should believe!? Us? Them? No one?
Admittedly, the topic isn’t simple.
You’ve got the Bureau of Labor Statistics’ (BLS) Consumer Price Index (CPI), the widely-accepted gold standard of measuring inflation. There’s also the CPI without food and energy in the calculation, which is called the core rate. By subtracting the highly-volatile food and energy sectors, it supposedly provides a better measure of inflation, or the “core” rate. But it seems like they should be included… don’t we all buy food and energy?
Of course, the CPI is useful for long-term analysis. It shows clear trends – periods of rising prices and falling prices. But these trends are usually only clear in hindsight. Not only does the BLS calculate CPI on a monthly basis, it releases the information on a lag… typically two to three months for the detailed report.
That’s of little use to short- and medium-term investors.
But I’ve found a better way…
By taking the ratio of industrial metal prices to 30-yr Treasury bond rates, I’m able to track inflation without waiting months for the latest CPI numbers.
Take a look here…
The blue line is the Consumer Price Index. The green line is my “real-time inflation indicator,” which updates daily.
As you can see, the correlation between the two is clear. This tells me the metals-to-rates ratio is a worthwhile measure of inflation. Plus, this real-time measure tends to turn several months before major peaks and valleys in the actual CPI measure. I’ve circled these instances above.
While I’d never advocated making investment decisions based on day-to-day changes in inflation… I do look for any useful tool that helps me stay ahead of the curve. And this indicator is clearly one of them.