Multilingual content from IBKR

Close Navigation
Learn more about IBKR accounts

Another Inflation Omission

Posted June 10, 2024 at 10:45 am
Simon Lack
SL Advisors

The inflation statistics offer a rich trove of counterintuitive methods that often inspire this blogger. It’s an important issue because voters cite inflation, for which they blame Joe Biden, as one of their top concerns. Inflation reports show it’s coming down, although that doesn’t mean earlier price hikes are being reversed, simply that prices are going up more slowly.

The latest statistician’s gem is how the CPI treats insurance, something noted recently in the NYTimes (see Home Insurance Is Clobbering Consumers. Yet It’s Barely Counted in Inflation).

The article notes that the typical homeowner with a government-backed mortgage has seen a 41% increase over five years, 7.1% pa. Many parts of the country have seen bigger increases. This is especially true in Florida, where the only reasonable coverage comes from state-backed Citizens. Our condo building’s policy in Naples is up 54% over the past two years.

The CPI only picks up what renters pay for insurance. This comes back to how economists at the Bureau of Labor Statistics (BLS) treat housing (see Why You Can’t Trust Reported Inflation Numbers). Since the CPI measures goods and services, the BLS estimates the value of shelter (a service) provided by a home (an asset). It’s not an intuitive approach since two thirds of Americans obtain shelter by owning their home. But the BLS uses Owners’ Equivalent Rent which in theory should, over the long run, equate to the cost of owning a home.

Therefore, the CPI omits homeowners’ insurance, because that’s part of the cost of owning an asset and they’re not measuring assets.

The Personal Consumption Expenditure (PCE) index includes home insurance but with a very low weight. They take insurance premiums less underwriting losses and expenses (referred to as the insurers’ combined ratio) to set the weight. In effect they’re looking at the margin insurance companies charge over claims as the service. So if premiums go up 10% to match claims, the PCE index will capture that but if insurers have a 95% combined ratio (ie a 5% profit margin) then the weight will be 1/20th of what it is to the consumer.

Presumably if households self-insured their homes and endured repair and replacement costs that rose 10%, this would flow through fully into the PCE although not the CPI since it’s not concerned with the cost of holding assets.

Insurance expenditures last year were $469BN out of total PCE of $19TN, around 2.5% of disposable income.

It’s an arcane topic and scarcely one that any politician can address in a soundbite. Insurance premiums have been outpacing inflation. It’s another reason why the published inflation statistics aren’t that useful for the typical consumer. There’s no conspiracy –  simply a bunch of economists producing numbers that fit their theoretical models but not the actual experience of Americans. It shows why inflation as perceived by voters is higher than the reported numbers.

The AI boom continues to improve the fundamentals for natural gas. Wells Fargo recently upgraded Kinder Morgan and Williams Companies to Overweight. A few years ago fears of “stranded assets” caused some to worry that pipelines would lose their customers within a decade or so, greatly reducing the npv of their anticipated cashflows. Since then, renewables stocks have collapsed as energy realism has started to return.

If Enterprise Value/EBITDA (EV/EBITDA) moves from 9X-10X, assuming a 50/50 split between equity and debt the typical company could appreciate by around 20%. Wells Fargo analyst Michael Blum thinks EV/EBITDA multiples for natural gas pipeline companies could eventually increase by around 2.5X.

New York governor Kathy Hochul abandoned the planned congestion charge for New York city, worried about the impact on businesses still recovering from the pandemic. Forcing more travelers onto public transit reduces emissions and should find support among Democrat voters in NY and neighboring New Jersey. But Democrats have mostly failed to convince people that the energy transition is worth paying for.

I endured a two hour, delayed journey on NJ Transit one day last week which made me late for dinner in NY. Public transit from the suburbs isn’t reliable enough.

A couple of weeks ago I had the opportunity to meet Vlad Zherenovsky from NJ –based Kraner, LLC along with his colleagues Robert Castella and Joe Pandolfo. We chatted about midstream energy, a sector we all agreed offers attractive upside.

Vlad and his family fled Latvia following the collapse of the Soviet Union with their savings wiped out. He finished his education here and went into finance, starting Kraner in 2010. Vlad’s is another immigrant success story.

Bill Shepherd recently turned 98. He is our oldest client, although not by much. Lunch with Bill is always a pleasure as we delve into the intricacies of the energy sector together. His father and mother were both born in England, in 1897 and 1900 respectively. They emigrated to the US and married in Brooklyn, NY in 1924. Like me, Bill is proud of his English heritage.

Originally Posted June 10, 2024 – Another Inflation Omission

Important Disclosures

The information provided is for informational purposes only and investors should determine for themselves whether a particular service, security or product is suitable for their investment needs. The information contained herein is not complete, may not be current, is subject to change, and is subject to, and qualified in its entirety by, the more complete disclosures, risk factors and other terms that are contained in the disclosure, prospectus, and offering. Certain information herein has been obtained from third party sources and, although believed to be reliable, has not been independently verified and its accuracy or completeness cannot be guaranteed. No representation is made with respect to the accuracy,  completeness or timeliness of this information. Nothing provided on this site constitutes tax advice. Individuals should seek the advice of their own tax advisor for specific information regarding tax consequences of investments.  Investments in securities entail risk and are not suitable for all investors. This site is not a recommendation nor an offer to sell (or solicitation of an offer to buy) securities in the United States or in any other jurisdiction.

References to indexes and benchmarks are hypothetical illustrations of aggregate returns and do not reflect the performance of any actual investment. Investors cannot invest in an index and do not reflect the deduction of the advisor’s fees or other trading expenses. There can be no assurance that current investments will be profitable. Actual realized returns will depend on, among other factors, the value of assets and market conditions at the time of disposition, any related transaction costs, and the timing of the purchase. Indexes and benchmarks may not directly correlate or only partially relate to portfolios managed by SL Advisors as they have different underlying investments and may use different strategies or have different objectives than portfolios managed by SL Advisors (e.g. The Alerian index is a group MLP securities in the oil and gas industries. Portfolios may not include the same investments that are included in the Alerian Index. The S & P Index does not directly relate to investment strategies managed by SL Advisers.)

This site may contain forward-looking statements relating to the objectives, opportunities, and the future performance of the U.S. market generally. Forward-looking statements may be identified by the use of such words as; “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential” and other similar terms. Examples of forward-looking statements include, but are not limited to, estimates with respect to financial condition, results of operations, and success or lack of success of any particular investment strategy. All are subject to various factors, including, but not limited to general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors affecting a portfolio’s operations that could cause actual results to differ materially from projected results. Such statements are forward-looking in nature and involves a number of known and unknown risks, uncertainties and other factors, and accordingly, actual results may differ materially from those reflected or contemplated in such forward-looking statements. Prospective investors are cautioned not to place undue reliance on any forward-looking statements or examples. None of SL Advisors LLC or any of its affiliates or principals nor any other individual or entity assumes any obligation to update any forward-looking statements as a result of new information, subsequent events or any other circumstances. All statements made herein speak only as of the date that they were made. r

Certain hyperlinks or referenced websites on the Site, if any, are for your convenience and forward you to third parties’ websites, which generally are recognized by their top level domain name. Any descriptions of, references to, or links to other products, publications or services does not constitute an endorsement, authorization, sponsorship by or affiliation with SL Advisors LLC with respect to any linked site or its sponsor, unless expressly stated by SL Advisors LLC. Any such information, products or sites have not necessarily been reviewed by SL Advisors LLC and are provided or maintained by third parties over whom SL Advisors LLC exercise no control. SL Advisors LLC expressly disclaim any responsibility for the content, the accuracy of the information, and/or quality of products or services provided by or advertised on these third-party sites.

All investment strategies have the potential for profit or loss. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be suitable or profitable for a client’s investment portfolio.

Past performance of the American Energy Independence Index is not indicative of future returns.

Join The Conversation

If you have a general question, it may already be covered in our FAQs. If you have an account-specific question or concern, please reach out to Client Services.

Leave a Reply

Disclosure: SL Advisors

Please go to following link for important legal disclosures:

SL Advisors is invested in all the components of the American Energy Independence Index via the ETF that seeks to track its performance.

Disclosure: Interactive Brokers

Information posted on IBKR Campus that is provided by third-parties does NOT constitute a recommendation that you should contract for the services of that third party. Third-party participants who contribute to IBKR Campus are independent of Interactive Brokers and Interactive Brokers does not make any representations or warranties concerning the services offered, their past or future performance, or the accuracy of the information provided by the third party. Past performance is no guarantee of future results.

This material is from SL Advisors and is being posted with its permission. The views expressed in this material are solely those of the author and/or SL Advisors and Interactive Brokers is not endorsing or recommending any investment or trading discussed in the material. This material is not and should not be construed as an offer to buy or sell any security. It should not be construed as research or investment advice or a recommendation to buy, sell or hold any security or commodity. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

Disclosure: Futures Trading

Futures are not suitable for all investors. The amount you may lose may be greater than your initial investment. Before trading futures, please read the CFTC Risk Disclosure. A copy and additional information are available at

IBKR Campus Newsletters

This website uses cookies to collect usage information in order to offer a better browsing experience. By browsing this site or by clicking on the "ACCEPT COOKIES" button you accept our Cookie Policy.