Grasping The Cpi And What Inflation Really Is
Some misstate inflation, for example, as the rising of prices
. In fact, inflation actually represents the devaluation of currency. The CPI, then, measures the effects of inflation.
The value of a dollar may decrease, but the amount of currency consumers pay for goods and services does not follow this pattern, and instead increases to account for the item's actual worth.
Consider the old standby reference point: a loaf of bread. In 1959, a loaf of bread cost 20 cents. Today consumers can expect to pay upwards of $2. Has the intrinsic value of a loaf of bread changed? Does it contain more slices or make more sandwiches today than it did in 1959?
Today's $2 loaf of bread is the same product as 1959's 20 cent loaf. The currency used to purchase the bread, however, is worth less than a tenth of its 1959 value.
Is the CPI an Accurate Measure of Inflation?
Like currency, the CPI is subject to government regulations and even significant changes on occasion. For example, prior to 1983, the CPI measured housing prices. When it became apparent that the housing market was too volatile to track accurately, this measure was changed to reflect rental costs.
Further, each individual item measured by the CPI carries a government-dictated weight, and these weights change based on the amount an average family spends annually. Even more frightening is the fact that the government has repeatedly substituted new products for existing ones in an effort to reflect the desired numbers.
The controversy surrounding these methods amounts to far more than simple number crunching.
These numbers are used to determine Social Security payments, for example. Since it is in the government's best interest to disburse lower payments to retirees, some finance experts suspect that changes regarding which products are tracked and how these numbers are calculated mask an ulterior motive.
While intended to create a basis for determining fair wages and taxation, the CPI has proven far too subjective and easily manipulated to provide an accurate measure of inflation. The numbers tracked and released by the government annually carry about as much innate value as currency. It's worth what the government says it's worth, and that can change arbitrarily at any time.
Why Investors Find Stability in Precious Metals
The more the dollar fluctuates, the more likely experienced investors are to redirect their efforts toward gold coins, silver coins and other precious metal investment. History has repeatedly shown this trend, and we are seeing it again in the current economy.
Currency is, for lack of a better word, flaky. It hasn't enjoyed true stability since the U.S. dollar ceased to be backed by gold in the early 1970's. Precious metals, on the other hand, will always have value due to their physical tangibility and rarity.
In a volatile market, the safest choice is lies in investments with long-term proven value. Gold and silver bullion and other precious metals answer this need, and show no sign of ever being subject to the manipulated inflation numbers reflected by the CPI.
by: Max Nolan
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