Inflation Monitor October 2014


consumer price index


IAG Inflation Monitor – September 30, 2014Inflation Rate Score
IndexValue1mo change1yr change5yr changeInflation Score
Economic Inflation
Consumer Price Index (CPI)237.85-0.17%1.89%10.40%3
Producer Price Index (PPI)206.80-0.58%1.77%18.17%3
1 Yr Treasury Bill Yield0.110.00%15.38%76.09%2
10 Yr Treasury Note Yield2.544.95%-9.61%-25.29%2
Real Interest Rate-1.59-1.88%-1.39%1.94%4
ISM Manufacturing Index59.003.33%4.80%10.28%4
Capacity utilization78.80-0.38%1.29%15.37%3
Industrial Production Index104.12-0.10%4.12%21.95%3
SSA COLA0.00%1.50%3
Median Income65021.000.22%2.04%3
Google Inflation trendStableStableStableStable3
IAG Inflation Composite Index*StableStableStableStable3
IAG Price Composite Index 1**0.23%2.22%12.30%3
IAG Price Composite Index 2**StableStableStableStable3
US GDP17328.201.83%4.00%20.82%4
S&P 5001977.80-1.28%17.62%87.10%4
Market Cap to GDP122.70%121.20%106.30%78.40%4
IAG Economic Inflation Index* StableStableStableStable3
Housing Inflation
Median Home price219,800.00-0.81%4.82%24.00%4
30Yr Mortgage Rate4.12%-0.24%-7.62%-20.62%2
Housing affordability153.80-0.32%-4.29%4
US Median Rent756.002.86%5.73%3
IAG Housing Inflation Index*Stable Stable Stable Stable3
Monetary Inflation
US Govt debt held by Fed (B)2,705.903.49%39.72%312.17%1
M2 Money Stock (B)11,494.100.36%6.42%36.68%4
Monetary Base (B)4,096.942.20%19.81%137.07%4
Outstanding US Gov’t Debt (B)17,632.610.18%5.34%52.73%3
Total Credit Market Debt (B)57,538.860.79%3.58%9.54%3
Velocity of Money [M2]1.530.00%-2.17%-10.24%2
US Trade Balance-40,546.00-0.65%2.86%23.65%3
Big Mac Indexmild inflationmild inflationmild inflationmild inflation4
US Dollar86.064.01%7.13%11.95%2
IAG Monetary Inflation Index*StableStableStableStable3
Electricity (cents / KW hour)11.017.84%2.90%11.55%3
Coal (CAPP)2.25-1.75%-6.64%7.14%2
Natural Gas4.151.52%18.15%-14.36%3
IAG Energy Inflation Index*mild deflationmild deflationmild deflationmild deflation2
Food and Essentials
Orange Juice143.95-3.97%9.97%57.49%3
CRB Foodstuffs Index426.090.52%4.09%39.26%3
IAG Food and Essentials Inflation Index*mild deflationmild deflationmild deflationmild deflation2
Construction and Manufacturing
CRB Raw Industrials512.42-3.30%-0.90%18.51%3
Total Construction Spending (M)960,958.00-0.81%4.99%7.82%3
IAG Construction & Manufacturing Index*mild deflationmild deflationmild deflationmild deflation2
Precious Metals
IAG Precious Metals Inflation Index*mild deflationmild deflationmild deflationmild deflation2
Innovative Advisory Group Index
IAG Inflation Index Composite*mild deflationmild deflationmild deflationmild deflation2


types of inflation
How different types of inflation measure against each other



* If you would like a description of terms, calculations, or concepts, please visit our Inflation monitor page to get additional supporting information. We expect that by the next issue will have much more information on this page to help along.

* Our Inflation Score is based on a proprietary algorithm, which is meant to describe the respective category by a simple number. The scores range from 1-5. One (1) being the most deflationary. Five (5) being the most inflationary. These scores are meant to simplify each item and allow someone to quickly scan each item or section to see the degree of which inflation or deflation is present. We have also added our own indexes to make it even easier for readers. The Inflation Equilibrium was created as a quick summary for the whole data series.


Inflation Monitor October 2014 – Introduction

This is the first issue of the Innovative Advisory Group Inflation Monitor. We created this Inflation Monitor as a part of the research we do internally at Innovative Advisory Group. While we have always done this research, we felt that with the new upgraded website, we would add a few new features. Our plan is to publish a new issue of the Inflation Monitor each month. Each issue will be accompanied with a brief summary of ideas, concepts having to do with inflation, and a few notable charts, which have I have found interesting either in the past month or in general. Everything will be related to inflation, or rather what I call “flation”. Maybe if I need to spice things up a bit, I’ll add a bit of humor. Please contact me to send your feedback on how I can make this monthly Inflation monitor a better tool or resource for you.

Thank you for reading and I hope you enjoy.

Kirk Chisholm

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Inflation Monitor October 2014 – Summary


“Contradictions do not exist. Whenever you think that you are facing a contradiction, check your premises. You will find that one of them is wrong.”

― Ayn Rand, Atlas Shrugged

The most common statements I have heard in the past 5 years since the global financial crisis are:

With all the money printing the Federal Reserve and the US government have been doing, we will definitely have hyper-inflation. It is only a matter of time.” and “The US dollar will continue to drop in value. Eventually, we will no longer be the world’s reserve currency.”

I’m not sure if people say it because it is something they heard from some soothsayer on the news or other media, but in my opinion, it is nothing but hyperbole. I actually agree with the later part of these statements, but that will take many years and will happen very slowly. There is no way anyone can know for sure what will happen given the complexity of the US economy or as it pertains to the global financial system. Wall Street financial firms hire the best and brightest minds to answer these questions, and even they cannot find the answer of what will happen in the future. The future is unknowable, and the market has a habit making a fool out of smart people.

While we don’t claim to know the future, we do our best due diligence and research to determine the probability of different outcomes based on data and existing conditions. Risk management is an important part of our process at Innovative Advisory Group. In order to mitigate certain risks, first you have to understand what they are. In this case, Inflation risk is one of the risks we focus on to minimize its impact.

Inflation risk

The risk of inflation is that your money or wealth is not growing as fast as inflation or essentially the prices of goods and services. The risk of inflation has been a persistent fear since the beginning of the 1900s. While it is not naturally occurring as a constant in the US economy, it has been determined by the Federal Reserve that it is important to have a constant rate of inflation. Therefore they have made a conscious effort to make this happen.

There was a time when both inflation and deflation persisted in an alternating fashion throughout the economy. This was common in the 1800s. During times like this, it was more common to have people sticking money “in their mattress” for safety. At the time, some of this was due to a distrust of banks as well as not having an urgent reason to invest it, in order to generate more wealth for their family. While this might have been fine during that time period, the money was not flowing throughout the economy ( the velocity of money ), which generally causes it to be more productive. A persistent rate of inflation causes people to spend it, or invest (take risk) their capital into the economy, rather than stick it under their mattress, in order to earn more than the rate of inflation.

As of September 2014, there was approximately $11.5 Trillion US dollars floating around the economy. If for example, you took $10 trillion US dollars and stuck it under your mattress for an indefinite period of time, outside of having a wonderful night sleep, you would have immediately caused deflation. While technically the money is still in circulation, it isn’t actually in circulation because you have taken it out by saving it in a manner which is not productive. One way to measure this is through the velocity of money. This statistic measures how frequently the nation’s money supply circulates through the economy.

Lets take a hypothetical scenario (which based on the period from 2008-2014 might not be far-fetched), where the US government decides to print $12 Trillion dollars (effectively doubling the money supply in the US economy), then they decide to stick that into a bank vault at Fort Knox. What do you think would happen?

  1. Prices of goods and services would double overnight?
  2. Prices of goods and services would stay the same?
  3. Prices of goods and services would drop?

If you believe that if the US government doubled the money supply overnight and stuck it in a bank vault, that prices would skyrocket or double overnight, then you need to learn more about inflation. The act of printing money is not what causes inflation. It is both the action of using that money and the perception of that money being used that causes inflation. Perception is a very important factor which I want to discuss in a later issue.

The primary questions you have to ask yourself, are:

what is inflation?

what are the causes of inflation?

What are the effects of inflation?

I realize that talking about economics is like watching paint dry for most people, but if you are interested in learning more about inflation, deflation, and “-flation” and how they affect the economy, then you will want to follow this and future issues of the IAG Inflation Monitor. I hope to provide more insight into these and other similar questions in future issues.



Charts of the month

The Velocity of Money

Velocity of money
A declining velocity of money is deflationary

The velocity of money is a foreign concept to most people. I briefly referenced the velocity of money in the above section, but I felt it was important to put a chart here so you could visualize it and get a better grasp of the concept and how it affects inflation. Think of the velocity of money as a multiplier of the existing money supply (the existing amount of money in circulation). As money circulates more frequently through the US economy, the velocity of money increases. This increase in the velocity of money is inflationary. When the velocity of money is declining, fewer transactions are being made with the money in circulation. This has a deflationary effect.

As you will notice, the velocity of money has been declining since 1997. There could be a number of reasons for this, but those are beyond the scope of this month’s post. What is important is that the velocity of money is declining and that it will have a deflationary effect on the economy. The current economic thinking at the Federal Reserve is that the US economy needs to have a constant positive rate of inflation of about 2.0% to have price stability, continue to grow, and not get caught in a deflationary trap. In order to offset the declining velocity of money, more money must be printed or deflation will set in. Whether this will happen or has already happened will be discussed in a future issue.

Deflation + Printing money =/= Inflation. Why?

The Federal Reserve and the US government have been expanding the money supply (or printing money) for the past 6 years at an abnormal rate. While this should be inflationary at a basic level, we have not seen the effects that most people are expecting. Why?

There are many reasons for this, and we will be discussing many of them over the upcoming issues. If you are a believer that we will soon experience high or hyper-inflation due to all the money printing, then you should consider why the Federal Reserve is printing so much money. Ask yourself, is it possible that the expansion of the money supply is being instituted in order to fight deflation. If this is the case, then anytime they choose to print money, deflation is winning. If you look at the data in the spreadsheet above, you will see that despite the rise in the S&P 500 to record levels, many areas in the US economy have been experiencing deflation to some degree, rather than inflation.

Deflation is not a bad thing

There are two more points I want to leave you with. One is that both inflation and deflation are naturally occurring and are both important to a healthy economy. Inflation is being artificially manipulated by the Federal Reserve. They have always done this. It is not a secret. One of their goals is to create an environment with a stable and low inflation. However, both inflation and deflation are natural occurrences. So depressing one of these occurrences for a long time does have adverse effects which cannot always be predicted. Nassim Taleb wrote an article in Foreign Affairs about this very topic, called The Black Swan of Cairo. Trying to suppress risk, or deflation, in this case, tends to create the opposite result in unpredictable ways.

The second point is that regardless of the “popular” economic wisdom of today, deflation is not bad. Technology is an example of this. in the past 20+ years technology has become an increasingly larger part of the US economy. Most people perceive this as a good thing, and rightfully so. Technology allows us to be more efficient with our time and make our lives easier. However, technology is a large deflationary force to contend with. technology has been advancing at an exponential rate and has at the same time reduced the costs of many everyday items.

Take buying a computer as an example. I have bought a similar type of computer for the past 20 years. I have always bought a computer which is a step down from top of the line. I have found this to be the best value for my needs, and it tends to last about 7 years, which is longer than most lower end computers. However, during that time period, the price of that grade of computer has slowly declined. At the same time, the quality of my computer has jumped realistically due to Moore’s law. This is just the computer itself. Technology has offered other examples. Take books as another example. What would have cost $12 for a paperback book 20 years ago, now costs 0-$5 for the equivalent E-book.

Technology has brought our society many great things. Deflation has been a natural side effect of increased inefficiencies throughout the economy. While this is not a bad thing, the economists occupying positions of power fear deflation because it will upset the balance they have so carefully tried create with inflation. The deflation caused by technology is a superior force which the Federal Reserve has been battling with since it entered the picture in the 1990s. I expect that this is a war which will not be winnable for them. Technological changes are only going to continue to grow and most likely at an exponential rate. That will require either a lot more money printing or new tactics to get their desired effects. Based on what I have been seeing, I expect it is only a matter of time before deflation shows itself again.


The Cost of Education in the US

cost of education
Why is the cost of education highly inflationary?


Education cost inflation
Textbook inflation


The best way to beat inflation is to buy a college and sell college textbooks.


If found the chart comparing books a few weeks ago and felt it was really interesting. So I created a few more charts to emphasize the point. While we are experiencing a subtle balance between inflation and deflation in the general economy, not everything is held in this balance. One item which has continued to rise at a high rate is the cost of education and the cost of education-related items. The inflation of education related books (or textbooks) seem to be in line with all other education related expenses. It might lead to you wonder why this is the case. While I don’t have a definitive answer for this, I suspect that the correlation of student debt to college costs has more in common than just data. While I don’t want to make the statement that correlation implies causation (one of my earlier posts), I would base my suspicions on how debt effects markets. When debt ( or rather an abnormal amount of debt) is introduced into a market it tends to have an inflationary effect. There are more dollars chasing the same amount of items, so inflation is inevitable. This has been the case with housing, technology stocks, car loans, and other markets.

We agree with the general claims that there is a student loan bubble being blown. What we don’t know is what will cause it to pop. I believe that the nature of higher education will change in the next 10-15 years. The nature of this shift will come down to whether the student wants a diploma or whether they want to learn. These reasons are not mutually exclusive. If a student just wants to learn, there are currently ways they can do this for free without going to college. For example, Harvard, MIT, Stanford, and many other schools have many courses from their curriculum online for anyone to see. Some colleges even have uploaded their professor’s lectures online for public viewing. For example, Yale has their Open Yale Program. While there are good reasons for going to these colleges rather than just learning online, it gives people access to education who cannot afford those schools.

This inevitable shift in education will cause a massive change in the costs and nature of higher education. Only time will tell as to what happens. However I believe, just like any other new technology, it will bring a large deflationary effect to the cost of education. This will be a good thing for people everywhere who want the best education possible.


The Rise of the US Dollar


deflation US Dollar
20 years of the US dollar

Since the financial crisis, people have been saying the US dollar will eventually be worth a lot less due to all the money printing. This month’s chart might change your mind. I’m not going to say much about the US Dollar at the moment other than to point out that the price of the US dollar on this chart is in relationship to other currencies ( Euro, Japanese Yen, Pound Sterling, Canadian Dollar, Swedish Krona, Swiss Franc). The price of the US dollar changes in relationship to these currencies, so if you are looking at the US dollar as a measure of inflation, it will only be relevant if the other currencies are constant (which they are not). The best way to measure the US dollar is compared to something which is more constant like gold, real estate, land, or some other hard asset.

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The IAG Inflation Monitor – Subscription Service

We are initially publishing this Inflation Monitor as a free service to anyone who wishes to read it. We do not always expect this to be the case. Due to the high demand for us to publish this service, we plan to offer it free for a while and when we feel we have fine tuned it enough, we do plan on charging for access. Our commitment to our wealth management clients is to always provide complimentary access to our research. If you would like to discuss becoming a wealth management client, feel free to contact us.


1) Federal Reserve – St. Louis

2) U.S. Energy Information Administration

3) U.S. Post Office

4) TD Ameritrade

5) National Association of Realtors

6) The Economist

7) The Commodity Research Bureau



* IAG index calculations are based on publicly available information.

** IAG Price Composite indexes are based on publicly available information.


About Innovative Advisory Group: Innovative Advisory Group, LLC (IAG), an independent Registered Investment Advisory Firm, is bringing innovation to the wealth management industry by combining both traditional and alternative investments. IAG is unique in that we have an extensive understanding of the regulatory and financial considerations involved with self-directed IRAs and other retirement accounts. IAG advises clients on traditional investments, such as stocks, bonds, and mutual funds, as well as advising clients on alternative investments. IAG has a value-oriented approach to investing, which integrates specialized investment experience with extensive resources.

For more information, you can visit

About the author: Kirk Chisholm is a Wealth Manager and Principal at Innovative Advisory Group. His roles at IAG are co-chair of the Investment Committee and Head of the Traditional Investment Risk Management Group. His background and areas of focus are portfolio management and investment analysis in both the traditional and non-traditional investment markets. He received a BA degree in Economics from Trinity College in Hartford, CT.

Disclaimer: This article is intended solely for informational purposes only, and in no manner intended to solicit any product or service. The opinions in this article are exclusively of the author(s) and may or may not reflect all those who are employed, either directly or indirectly or affiliated with Innovative Advisory Group, LLC.

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