Today news broke that inflation is continuing to rise. It is up 6.2% on a year-over-year basis, and 0.9% on a month-over-month basis.
This means that a dollar buys 6.2% less than it did in October 2020, and 0.9% less than it did as recently as September 2021.
But it’s important to note that the CPI formula, as calculated by the Bureau of Labor Statistics, has changed many times over the years. There have been, since CPI was first tracked in 1919, six “comprehensive revisions” to the formula over the years. The most recent was 1998, but there was also a “geographic revision” done in 2018.
This website, called Shadow Government Stats, keeps track of several key economic measures, but provides what it says are the “real” numbers:
The CPI on the Alternate Data Series tab here reflects the CPI as if it were calculated using the methodologies in place in 1980. In general terms, methodological shifts in government reporting have depressed reported inflation, moving the concept of the CPI away from being a measure of the cost of living needed to maintain a constant standard of living.
The main thrust is that all the revisions since 1980 have been done with the goal not of improving accuracy, but instead in an effort to paint a rosier picture of the economy and hide from the general public how bad things truly are for them.
So what is the inflation rate right now if calculated using the methodologies in place in 1980?
This would put us in late 1970s/early 1980s territory. Back then, the Fed under Paul Volcker jacked interest rates up above 15% in order to reign in runaway inflation, and it caused a very painful “double dip” recession.
We are nowhere close to a tightening cycle like the one that was implemented under Volcker in the early 1980s, however, which means there is one major way that the average American can take advantage of the high inflation rate coupled with low interest rates: buy a home.
At no point in the last decade has the inflation rate ever outpaced the 30 year mortgage rate. You take out a fixed-rate mortgage, and assuming your income increases along with inflation over time, you’re going to be paying back your loan with money that is worth way less than it was when you initially took out the loan.
To illustrate the point, I’ll use a scenario that, while extreme, will make things clear: say you take out a mortgage for $300,000 to buy a home right now. Then, over the next few years, the US undergoes some sort of runaway hyperinflation, and in 2025, cars that used to cost $30,000 are now costing $300,000, and homes that used to cost $300,000 are now going for $3,000,000.
But your original loan was still just for $300,000. That number doesn’t go up with inflation. So if the dollar devalues significantly, by 2025 you could pay off your $300,000 loan easily within a few years–simply because $300,000 does not go anywhere near as far as it did in 2021.
Obviously it’s an extreme scenario to assume that level of hyperinflation, but the point remains: you pay back your home loan, which you took out now, with dollars that are being constantly devalued over time, which means that, years down the road, it’ll be a lot easier to pay off the principal on your mortgage.