The relativity of Inflation

Dear Ladies and Gentlemen

Many thanks for all the inspiring and challenging messages I received to my last weekly mail. The topic „fear of inflation“ indeed triggered a lot of comments, and I apologize for the somewhat delayed answering to some of them, as I was overwhelmed by the sheer number of emails I had received. Many thanks for your active participation!

A fair number of the mails I had received covered the question and interpretation of a definition of inflation. If I look at the concept of inflation, I am not so much concerned if inflation should be called inflation because a country’s monetary base is getting inflated (the „Austrian“ view) or if prices of a basket containing all sorts of goods move up (the „Keynesian“ view). These definitions (to some, they become almost religious in character) are superfluous for broad sections of the population and are usually depending on individual perspectives and defending one, or the other therefore is mostly an unnecessary loss of time. To me, the ultimate variable in the equation of inflation is the answer to how much money the average citizen (consumer) has in his pocket and what the purchasing power of that money is. Because this is what is relevant to the average person in the street.

Moreover, because I think that way, Ladies and Gentlemen, to me, the perception of inflation is a highly relative measure, depending on cultural backgrounds, socio-cultural backgrounds, age, country of citizenship, health status, and more. Let me elaborate.

The statistical inflation number per country is generally calculated with the help of a basket of goods – naturally that basket of goods changes (sometimes more sometimes less) from country to country, according to what the country’s economists think should belong in the basket and therefore be part of the inflation measure. The content of those baskets tends to change over time to adapt the shopping basket to changes in the shopping behaviour of a population. Some people would argue that because the content of the shopping basket changes, a long-term measure is complicated, and there are even people who claim, the changes in the shopping basket are executed only to replace products that go up in price a lot with products that show no to little price increase and thus serve to manipulate official inflation numbers.

Because I do not want to get into that discussion, and just for fun, I prefer to calculate my very own and individual inflation number by putting together my shopping basket with the ten products that are most relevant for our household and together cause the highest costs in our household budget. Thanks to Excel, this is quite an easy task. In my case, for example, housing has become cheaper over the last twenty years, because interest rates went down and as a consequence mortgage cost went down continuously as well, while for people who rent their house or apartment in most cases (a least in Switzerland) cost for housing has gone up. Again, the perception of inflation may change from country to country, but also from household to household.

One last thing I want to touch concerning inflation is the increase in some asset prices. Asset price inflation is real, and I firmly believe it will not stop as long as governments and central banks continue to pour liquidity into the economy. As a consequence, this will most probably lead to an even larger gap between asset owners and people who do not own such assets, and if now we want to somewhat philosophically speculate about further consequences, I think this has the potential to lead to some political unrest eventually.

I am looking forward to your comments!

Furthermore, Ladies and Gentlemen, I wish you a good start into the day, a wonderful weekend and above all, good health!

Please feel free to share your ideas and thoughts with me, but please do not forget (instead of hitting the reply button) to send your messages to smk@incrementum.li
Many thanks, indeed!

And now, Ladies and Gentlemen I wish you a great day and weekend.

Yours truly,

Stefan M. Kremeth
Wealth Management
Incrementum AG

Tel.: +423 237 26 60
Cell: +41 79 303 48 39
Im alten Riet 102
9494 Schaan/Liechtenstein
Mail: smk@incrementum.li