How Much Inflation Is There Right Now?

There is a general suspicion that the inflation rate is greater than the 2% admitted by government statistics. My personal experience is that it is greater, as there seems to be month left at the end of our household money. How much is inflation? Honestly, I have no idea. The following chart will demonstrate this.

As you can see if the CPI, the consumer price index, was calculated the same way it was done in 1980 the inflation rate right now would be 10%. If the rate was calculated the same way it was in 1990, then the rate would be 5%. Obviously 10 and 5 is greater than 2.

But each of us has our own bundle of goods and services we buy each month. I started thinking about this as I read John Mauldin's weekly newsletter. He pointed out that inflation for him (he has children in college) was much higher than 2%. Similarly, someone with a lot of medical expenses is seeing a lot more inflation than 2%. 

Ours was a little smaller. But there are also areas where there is deflation. I remember how proud our high school was to have their own computer in 1971. My memory is hazy, but I think it was $35,000 and had 4K of memory. I also remember my second computer circa the mid 80's. I believe it had 512K and it had an internal hard drive of a whopping 10 Megs. I was really hot stuff back then. I paid about $3000 for it, used. Right now I am in the market for a computer and will spend $1300 for a computer with 8 Gigs of memory and 1 terabyte of storage. The computer industry is massively deflationary. This has to be factored in.

State of the Art—for the 80's. As wrong as the current 2% CPI is, are the others any better? As obvious as it is to me that the rate is more than 2%, it is just as obvious it is not 10%. This is another factor that is making investment so difficult. If one cannot model the future, all planning is virtually impossible.

Obviously the future is not knowable—but right now it is not even guessable. But that won't stop me from guessing…prophecy is fun!

I think the dollar is headed up, not because the US is in great shape, but because everyone else is worse—the cleanest dirty shirt, as one financial wag put it. What happens when the two trillion in excess bank reserves is spent? What happens when the dollars in foreign hands come home? I have no idea. But you can guarantee it will not be pretty. It could happen tomorrow. It could happen in ten years. Or I could be right, and the crisis is 3 to 7 years away.

Get ready.

Space Colony Libra

This video is from the same people that brought you the Chickenomics video I showed last week, but don't hold that against it! This is much better. 

I remember reading a lot about space colonies not long after this video was made. The science is completely sound, but alas we humans do not do well in low gravity, in fact it destroys the bones. Solar radiation is a big hazard. But that is not the point of this dystopian short video. 

Is the future depicted in the video in our future? To a degree it already is. 

LIFO vs. FIFO

Join me deep in the weeds of accounting! The last time I went this deep in the weeds the beloved editor of the Prophecy Podcast blog commented that the post was mind-numblingly boring. This is even more deep into things as it discusses a rather obscure part of accounting. Yes, accounting. Ugh.

I had a discussion about this over coffee at the Cambridge House Conference I attended. The two other coffee drinkers were talking about the conference and I mentioned how inflation affected the profit and loss of a business. Since they are expecting inflation, what I said was shocking to them. 

LIFO and FIFO are two different accounting methods used for allocating inventory to the profit and loss for the business. (Sorry to have to slog through this.) 

Here is how Wikipedia describes the two accounting methods. 

FIFO and LIFO Methods are accounting techniques used in managing inventory and financial matters involving the amount of money a company has tied up within inventory of produced goods, raw materials, parts, components, or feed stocks. These methods are used to manage assumptions of cost flows related to inventory, stock repurchases (if purchased at different prices), and various other accounting purposes.

FIFO stands for first-in, first-out, meaning that the oldest inventory items are recorded as sold first but do not necessarily mean that the exact oldest physical object has been tracked and sold.

LIFO stands for last-in, first-out, meaning that the most recently produced items are recorded as sold first. Since the 1970s, some U.S. companies shifted towards the use of LIFO, which reduces their income taxes in times of inflation, but with International Financial Reporting Standards banning the use of LIFO, more companies have gone back to FIFO. LIFO is only used in the U.S.

I am expecting moderate inflation in the 10 to 20% range for a couple of years. Others are expecting deflation; others are expecting hyperinflation. But for discussion purposes let’s talk about how a 33% inflation rate would affect a business. 

Let’s say that there is a retail business with an inventory of $750,000 in widgets. This is a C Corp that pays 35% in taxes. (Yes, I am aware that the rate varies.) The corporation pays any wages that are due to shareholders. The corporation is able to keep the same number of widgets as before with great effort through the year, but now has $1,000,000 in inventory. But in terms of cash flow, the business is in the same situation it was before. What is the taxable income of the Corporation? If you said zero you would be right, if the corporation is using the LIFO accounting method. But if the FIFO method is being used, then the taxable income is $250,000. 

At 35% this is a tax of is $87,500. Where is this money supposed to come from? The business has barely managed to break even with the heavy inflation rate of 33%. This is why many corporations now use the LIFO method. 

So what is the big deal? Obama, in his never-ending search for new taxes, is proposing to abolish LIFO accounting. While this is an old proposal, it will continue to be offered until it is passed. Under normal circumstances this will just be a modest increase in taxes for most businesses. But for those with inventory that has a volatile price surge history, like say the lumber that I sell, it can be a major tax increase in a year. To be fair it can also result in a tax decrease if prices drop. A smaller inflation rate would be survivable for a business, but for many businesses it would be the proverbial straw that broke the camel's back. With hyperinflation and FIFO accounting every retail business in the US would close. 

Coming soon to a business near you. I can see a business surviving with high inflation and forced to FIFO accounting and the resultant tax for a year, maybe two, but then businesses will start closing. A tax on the phantom income due to inflation has the potential to close retail stores—remember that Safeway is a retail store. 

This is what was shocking to my coffee companions. The effect of this stealth tax could be extremely destructive and it is not on anyone's radar right now. It should be.

CORPORATE TAX RATES

TAXABLE INCOME	RATE
Up to $50,000	15%
$50,001 – $75,000	25%
$75,001 – $100,000	34%
$100,001 – $335,000	39%
$335,001 – $10 million	34%
Over $10 million – $15 million	35%
Over $15 million – $18,333,333	38%
Over $18,333,333	35%
ALTERNATIVE MINIMUM TAX*	20%

* The corporate AMT exemption of $40,000 is phased out with alternative minimum taxable income between $150,000 and $310,000. 

This chart is the technicalities of Sub C Corporation Taxes.   

Carrot Juice Is Murder

Yesterday on my blog post about reducing Soda consumption my friend and fellow blogger Eric Anderson at Universe of Lies said that he was OK because he drank carrot juice instead of Soda. I am not so sure this is true as Carrot Juice Is Murder. 

Practical Suggestions

This is actually a picture of the restaurant. I do not like telling people what to do. This may come as a shock to people that know me, as I am somewhat opinionated. But while I may express my opinion that the Chicken Pot Pie at the Daily Grill at LAX is great, I will not be upset if you order the New York Steak sandwich. (BTW I did this myself last week when I took my wife to the airport. What a miss steak.) 

But as the saying goes, you can't beat something with nothing. So in this spirit let me offer a suggestion on a first step that one can make to try to improve one's diet. I hope you watched the video Food, Inc I embeded on the blog before Youtube canned it. If so, you should be thinking about how to improve your eating habits. (If you missed it you can get it on a physical DVD from Netflix.) 

Drink water. Yes, I know the dangers of water expressed in the poster on the right—and remember that most people who die have consumed water in the previous 24 hours. But water is a great product, and cheap. What restaurants do is try to keep prices as cheap as possible and avoid crossing psychological pricing barriers like $9.99. But no one really notices that your soda costs $2.50. If there are two soda drinkers, and you eat out twice a week, that is $500 a year.  At the end of this year would you rather have a bag of junk silver worth $500 or some very expensive urine excreted over the last year? Of course if you instead buy coffee at Starbucks you have not gained anything.

How dangerous is soda anyway? Here is one estimate:

Researchers reported Tuesday that they have linked 180,000 obesity-related deaths worldwide to sugary drinks, including about 25,000 adult Americans.

Overall, 1 in 100 deaths of obese people globally can be blamed on too many sweetened beverages, according to a study presented at an American Heart Association scientific conference in New Orleans. Mexico leads the 35 largest nations in deaths attributable to over-consumption of sugary drinks, with the United States third. Japan, which has one of the lowest per-capita consumptions of sugary drinks, had the fewest sugar-related deaths.

There is however a big problem with this study: they are guessing. But is there anyone anywhere who thinks that soda drinks are “good” for you? They are at best neutral, and then only in modest amounts. Coke was originally sold as a “patent medicine”—and contained cocaine. (Nine milligrams per glass, according to some sources.) Once the cocaine was eliminated in 1903, it really was not a big deal. So what if you had 8 ounces of Coca-Cola at a drugstore a few times a month—that was not enough to harm you. But think about it. Gradually a few times a month became a few times a week. Eventually that became for many a few times a day. Also gradually the amount in a bottle, itself an innovation, went up—from 8 ounces to 12 to 16 to 20. The new 16.9 oz bottle is an attempt to raise prices, without appearing to raise prices. It is not as successful as they want. 

This cannot be good for you. 

So you should drink water instead. This is no doubt a worrying trend to "the powers that be." So naturally they are introducing something called fruit water. 

I am not sure of the meaning of this photo. Will Coke make you younger?The Atlanta-based company confirmed Monday that it would introduce a line of zero-calorie, carbonated, fruit-flavored waters called “Fruitwater” starting April 1. The drink will be part of Coca-Cola’s Glaceau unit, which makes other pricier bottled waters such as Vitaminwater and Smartwater.

Unlike the zero-calorie version of Vitaminwater, which is made with the natural sweetener stevia, Fruitwater will be sweetened with the artificial sweetener sucralose, best known as Splenda. It will not contain any fruit juice but the bottle notes that the drink is “enhanced with nutrients,” a reference to its B vitamins, magnesium and zinc.

Wonderful. Well, at least it is a diet product. Nothing wrong with that right? I can only say that as an experiment of one that diet drinks have not helped me one bit. Why is this? I have this feeling that the sweetness is fooling my body into doing things that cause me to gain weight. Is the sweet taste causing me to produce insulin? Is this dropping my blood sugar and making me hungry? I have no idea, but I am suspicious. 

Dr Kaplin comments:

A word of warning, he also is against milk. But the argument here is convincing. 

I have had this unfinished post in my drafts area for some time—ever since I reviewed Dr Kaplin's book. But I decided I needed it to sit a while until I could experiment on myself. I have not had a Diet Coke for some time. I have not noticed a significant difference except that things that did not use to taste sweet now do so. Maybe it has not been long enough. What is the most interesting to me is that I have not missed it at all. That alone is reason enough to keep it out of my diet. 

Would you wear this shirt as an honor? I am not saying that I will never have another Diet Coke. Traveling might be an issue, although it is not so far. Nor am I saying I will not buy a beverage in a restaurant from time to time. The $.65 ice tea at the local Greek restaurant seems a bargain. 

Is the soda you drink good for you? A little here and there is not harmful, but I used to drink at least 64 ozs. a day. The thought of it today makes me cringe. What are you doing right now in terms of what you eat and drink that would make you cringe if you thought about it? I bet you already know the answer. The question is, will you act on your knowledge?