Are your lights on upstairs?

We're talking inflation this week. It's a much bandied about subject around here. I believe it is significantly higher than the 2-3% the BoC likes to claim. Apparently I'm not alone:

Good investors check things out for themselves as Ronald Reagan recommended when he dealt with the Soviets: "Trust, but verify."

To take a concrete example: What do you think is the level of inflation? This is critically important, both if you invest, and if you plan for your retirement. In the case of investing, the rule of thumb is that the proper market price-to-earnings multiple is 20 less the inflation rate. So if inflation is 3 per cent, a PE of 17 times is reasonable. On the other hand, if inflation is 10 per cent, as it was in the late '70s and early '80s, then even a PE of 11 or 12 would be too high. As for retirement, no need to elaborate on the need to figure just how far your dollars would go in your golden years.

So, you may ask, what's wrong with taking Statscan's consumer price index figure? That number usually ranges between 2 per cent and 3.5 per cent. But is this the real inflation figure? No it isn't. In fact, the government says so specifically - although in very small print: The CPI is merely a measure for indexing civil service employees' pensions.

Seymour Schulich, in his wonderful book Get Smarter: Life and Business Lessons, says that in his experience, money loses 90 per cent of its value every 30 years. For example, a La-Z-Boy chair for the TV that costs today $2,000, had cost $200 about 30 years ago. A house that had cost $50,000 30 years ago, would cost today $500,000, and so on. A growth of 10 times in 30 years comes out to about 8 per cent a year.

Therefore, the best indicator for food inflation I have found is the price of yogurt. Yes, that simple, plain food item that - unless you buy it flavoured - is about the same everywhere. Since I have a good memory for prices, I know that eight years ago my family paid 29 cents for one of those little plastic containers of yogurt. Today we pay 79 cents. (You'd probably pay $1.29, but I am a value buyer.) This comes to 2.7 times the price in eight years, or a growth rate of 13.2 per cent a year!

How high is real inflation today? It is certainly not 3 per cent a year. Even if it is "only" 6 per cent, the market's PE is too high. But if inflation is really 8 to 10 per cent a year, then the market next year may see some reckoning, because its PE is way too high.

So why does everyone figure on inflation of 3 per cent a year, 3.5 per cent, tops? Because, as you probably realize by now, few people bother to check things out for themselves. Most rely on printed numbers and stats, instead of opening their eyes to physical reality. If you, on the other hand, start checking things for yourself, very soon you might know what no one else does - and could take advantage of it by acting on what few others see.

Kind of reminds me of when I talk RE with my peers. They keep saying the market has no where to go but up. They keep saying all the Realtors keep telling them so. And CMHC. And VREB. And the TV. And the Newspapers. Funny that.

VREB numbers should be out tomorrow. I'm thinking that the October numbers will prove to be a downward blip. I think, just from watching the low-end that prices will be up from October, but still below September's high. Sales will be the highest seen in November.

As an aside. I read that Schulich book two weeks ago. It's a great read. No chapter is longer than 5-6 pages. Well written, good thinking, plain lessons.