Gold's Hint: Inflation Underestimated by 40%?

By Barry Stearns

7/10, 19:03 EDT

Are Treasury Traders Underestimating True Inflation?

The Inflation Conundrum

The debate over the true rate of inflation has taken a new turn, with recent analysis suggesting that official metrics may be significantly understating the actual inflation rate. According to data from the Bureau of Labor Statistics (BLS), prices have grown at a compounded rate of 2.7% over more than a century. However, if we use gold prices as a proxy, the actual inflation rate could be as high as 4.6%.

  • BLS Data: The BLS reports that a basket of goods costing $1 at the end of 1920 would have grown 16-fold by the end of 2023, reflecting a compounded annual growth rate of 2.7%.
  • Gold as a Proxy: In contrast, gold prices suggest a compounded inflation rate of 4.6% over the same period. This implies that the BLS measure may be understating inflation by more than 40%.
  • Investment Implications: An investment of $100,000 in a hypothetical bond indexed to the BLS inflation rate would have grown to about $1.6 million. However, the same investment in gold would have surged to almost $10 million, highlighting the potential underestimation of inflation by official metrics.

Treasury Yields and Inflation

The current yield on 10-year Treasuries stands at about 4.30%, which is just 100 basis points above the most recent 12-month average headline inflation. This is significantly lower than the historical average yield of 5.85% over the past 60 years, raising questions about the adequacy of current yields in the face of persistent inflation.

  • Current Yields: The 10-year Treasury yield is currently at 4.30%, only 100 basis points above the recent average headline inflation.
  • Historical Context: The average yield on 10-year Treasuries over the past 60 years is 5.85%, making the current rate appear diminutive, especially given recent sticky inflation.
  • Inflation-Linked Treasuries: Data for inflation-linked 10-year Treasuries is available for only about two decades, but the current yields still seem inadequate when compared to historical norms.

A Thought

The underestimation of inflation by official metrics doesn't necessarily imply flawed statistics, but it does highlight the limitations of current methodologies. As the New York Fed acknowledges, the consumer price index, "though flawed, is still our most reliable indicator of changes in inflation." However, the significant disparity between BLS data and gold prices suggests that investors may need to reconsider their strategies, especially in the context of long-term investments. The persistent gap between official inflation measures and real-world experiences could have profound implications for asset allocation and risk management.