There are no perfect solutions when it comes to protecting assets from the ravages of inflation. While the United States Federal Reserve does not have an official inflation target, government officials are known to favor an inflation rate of at least 2 percent and define such a level as “price stability”. As a result, the minimum realistic assumption for inflation causes a doubling of the price level over thirty-five years. The reality could be far worse given the desire of the Fed to flood the system with liquidity through additional quantitative easing which, stripped of technical jargon, basically involves printing currency to purchase government bonds and other securities.
Financial instruments such as I-Bonds and Treasury Inflation Protected Securities (TIPS) are intended to provide inflation protection but the government is in charge of coming up with the official Consumer Price Index (CPI) that supposedly measures the overall price level. Many skeptics note that governments that allow high rates of inflation often manipulate official measures of inflation. However, the amount of data available today may make it more difficult for the government to manipulate statistics in the future.
According to the Financial Times, Google is planning to construct a price index that could eventually serve as an alternative to official government statistics. While the Google Price Index (GPI) is still a work in progress and only tracks web-traded goods, the potential for expansion into other sectors of the economy could provide a more complete picture of inflation in the future. As the range of goods sold over the internet expands over time to better mirror the overall economy, the GPI should more closely track to the actual inflation experienced by consumers.
For now, the GPI is showing a “very clear deflationary trend” for web traded goods this year and most economists do not see any widespread inflation on the immediate horizon. However, with Japan as a notable exception, there are few cases where a government in charge of a fiat currency wishes to create inflation and is unable to deliver.