The Real Inflation

I have written a few times about the disconnect between the inflation measure (CPI) and the extent to which prices of services have risen significantly, and which doesn’t seem to push the overall CPI figure higher. In Australia, these services include education, rent, energy, child care and health/medical. It is not that different in the US, where the central bank (The Fed) has the same long-term target of inflation (2% pa) as our RBA, but there is scepticism about how accurate the cost-of-living measure is.

The chart below shows many goods and services that are included in the CPI have increased much more than a few percent each year in the US. The goods that have decreased in price are mostly discretionary.

I have not seen such a chart on Australian CPI, but you would expect something similar. Technological advancement has brought benefits, reflected in most of the price reductions categories, but these are discretionary goods.

The prices of non-discretionary items have risen far more than discretionary items, which is why the average worker feels the pain. The internet and Amazon have had minimal impact on the cost of essential services.

Why is this important?

If you have your money invested in cash or term deposits, you are actually going backwards as the return on cash investments is actually less than the current CPI. Investing may seem risky because stock markets can go down as well as up over the short-term however, when you invest for the long-term, the risk is significantly reduced. As shown in the table below, investment markets returned between 5.6 & 16% pa (on average) over the last 10-years depending on the asset class you invested in. Those clients who remained invested during the last 12 months (and longer) have benefited greatly despite the volatility.

Notes:
1. Per annum total returns to 30 June 2020 except for the CPI which cover the 29.75-year period to 31 March 2020.
2. S&P/ASX All Ordinaries Accumulation Index.
3. MSCI World ex-Australia Net Total Return Index.
4. S&P500 Total Return Index.
5. Bloomberg AusBond Composite 0+ Yr Index.
6. S&P/ASX 200 A-REIT Accumulation Index.
7. Bloomberg AusBond Bank Bill Index.
8. ABS Consumer Price Index.

All fi­gures are in Australian dollars.