The great debate is on: Inflation or deflation?  Which will win out, the massive fiscal and monetary impulse coming from the Federal stimulus measures and the huge Fed-fueled growth in the money supply?  Or the sharp contraction in spending resulting from the lockdown, with all its knock-on effects?  Much hangs in the balance, especially since the markets are increasingly looking to the Fed as they chart a path forward for valuations — and Fed policy hinges in part on inflation. 

On the ground, though, individuals in daily life know the answer from their own perspective: it’s inflation.  The consumer price index (CPI) masks much of the inflation that Consumers actually experience on the ground — not only because often-quoted “core” CPI excludes food and energy, but because CPI weights of different components lag actual consumption patterns by several years.  Lockdown-driven shifts are accentuating that disconnect.  As the Wall Street Journal recently observed, for example, August saw the cost of food at home 4.6% higher than a year earlier — while food in workplace cafeterias was 3% lower.  Men’s suits are down 17%; but men’s pajamas are up 4%.  These changes clearly reflect supply and demand dynamics, but they also mean that consumers will be experiencing higher prices on a lot of what they’re buying, and will feel gaslit by the official CPI numbers.

Of course, that’s not a new experience.  Some of consumers’ most significant expenditures — on their homes, on medical expenses, and on education — so vastly outstrip the headline CPI numbers, and have done so for so many years, that they can feel like they’re living in an alternate reality.

Investment implications:  Official inflation measures, such as the consumer price index (CPI), or the personal consumption expenditures price index (PCE), are far from objective, in the sense that they often reflect little of the real price pressures being experienced by U.S. consumers.  While the inflation/deflation debate rages on in economics, consumers can be confident that the real answer is, and will remain, “inflation.”  In the long run, that bodes well for most financial assets, though particularly for gold.