Nutty Foodflation

Do you want a simple example of how inflation eats away at your money? One of our team members found a perfect personal example when his elderly father wanted to get rid of some of his aged cooking spices.

Apparently, not one to pay too much attention to best-before dates, rather than throwing out an old box of Empress Nutmeg, he used it as a proxy to roughly figure out the inflation over the last 50 years.

Highly scientific, this is not.   That said, here’s what he cooked up…

Seeing a clearly marked price on the box, he used AI to roughly determine when the spice was purchased. (According to ChatGPT, it was originally manufactured in the late ’60s or early ’70s).

The sale price was 40 cents.  That gives us a rough number to calculate inflation on when comparing it with today’s costs for a similar-sized box of nutmeg – which we see has increased to roughly $8 dollars.

So, a back of the napkin, or should I say AI generated calculation, tells us that the price of nutmeg has gone up by roughly 5% a year.

This is a handy calculation as it’s round-numbered.  So, it’s easy to understand that a dollar today is only going to be worth 95 cents next year.

But isn’t the rate of inflation said to be about 3%?  

What this also shows is how the public is often incorrect about how inflation is actually calculated. The coveted 2-3% inflation rate oft quoted by government economists does not align with the 5% inflation rate. 

That’s because governments use all kinds of methods to disguise the real rate of inflation to make themselves look good.

Here are 6 things to consider:

1. Government Inflation Metrics (CPI) Are an Average

• The government typically measures inflation using the Consumer Price Index (CPI), which tracks the price of a basket of goods and services over time.
• However, your personal spending habits may not match the CPI basket, so your experience with inflation may be very different.

📌 Example:

• If rent and groceries make up a large portion of your expenses and those are rising faster than other goods, your personal inflation rate will feel higher than the CPI suggests.

2. CPI Is “Smoothed Out” and Doesn’t Capture Sudden Price Shocks Well

• Government agencies average price changes across multiple categories, which can dilute the impact of major price hikes in key necessities like food, fuel, or rent.
• CPI is also adjusted for “substitution” effects, assuming that if beef gets too expensive, people will switch to chicken—this lowers the reported inflation rate.

📌 Example:

• Gas prices could double, but if the prices of other goods stay stable, CPI might not reflect the actual pain consumers feel at the pump.

3. “Hedonic Adjustments” Lower Reported Inflation

• Governments adjust CPI based on quality improvements—called hedonic adjustments.
• If a new iPhone costs more but has better features, they may discount the price increase in CPI calculations.

📌 Example:

• A new car costs 20% more than last year, but the government may argue it has better safety features, so the price increase doesn’t fully count toward inflation.

4. Housing Costs Are Misrepresented

• In many places, real estate and rent prices are skyrocketing, but the way housing costs are calculated in CPI underestimates the real impact.
• The “Owners’ Equivalent Rent” (OER) method used in CPI does not fully capture real-world mortgage/rent increases.

📌 Example:

• Home prices in Canada skyrocketed by 50%+ in some cities between 2020-2023, but the CPI only showed a 4-6% annual inflation rate.

5. The Government Has an Incentive to Understate Inflation

• Higher inflation leads to higher interest rates, which hurts borrowing costs for the government.
• Many government programs like OAS, pensions, and indexed benefits are tied to CPI, so lower reported inflation reduces government spending.

📌 Example:

• If real inflation is 8% but the government reports 3%, cost-of-living adjustments (COLA) for pensions or welfare stay lower, saving the government money.

6. Shadow Inflation: Shrinkflation & Hidden Costs

• Companies are reducing product sizes or quality instead of raising prices outright—this isn’t always captured in CPI.
• Service quality declines (longer wait times, fewer staff, more hidden fees), meaning you pay the same but get less.

📌 Example:

• A chocolate bar costs the same but is 10% smaller—inflation is hidden.

Bottom Line: CPI Understates Real Inflation for Most People

• Official inflation is a broad economic metric that doesn’t fully account for personal experiences.
• Real inflation (what people feel) is often much higher due to food, energy, housing, and service costs rising faster than the official CPI suggest.

The UpShot

Unscientific or not, real-world examples show us that there is a fundamental need to ensure your portfolio meets or exceeds that 5% inflation rate. The only way to ensure this historically has been to make sure that you hold a healthy chunk of equities in your portfolio.

We’re about to go into a period of high inflation once again. Trump’s tariffs, along with things like additional shipping charges, higher interest rates, and ever-increasing government expenditures, will mean ever-increasing costs. Proceed wisely.