(Kitco News) – The most important measure of inflation–the one against which investment decisions and monetary policies are benchmarked– is inaccurate, outdated and misleading by design, and the ratio between the Dow Jones Industrial Average and the gold price is the only reliable alternative, according to economist Vasilii Sapozhnikov at the Mises Institute.
“On August 12 the Bureau of Labor Statistics reported that consumer prices rose 0.1 percent in July and 3.4 percent over the previous twelve months, a tenth of a point below June,” Sapozhnikov wrote in a new analysis. “Markets treated the print as confirmation that the measuring rod is behaving.”
Sapozhnikov then suggests measuring the same economy by a different ruler. “On August 17 the Dow Jones Industrial Average closed at 53,459.78, near its all-time high,” he noted. “Gold was trading around $4,400 an ounce. Divide the first number by the second and the Dow costs about twelve ounces of gold. In early 2024 it cost about nineteen.”
“Priced in gold rather than in paper, the American stock market has lost roughly a third of its value in two and a half years—over exactly the stretch in which it kept setting nominal records,” he said. “Both descriptions are accurate. They are the same market expressed in two different units. Everything interesting in monetary economics lives in the gap between them.”
Sapozhnikov writes that every market price is actually a ratio, and while investors and governments often think of the price changing while the unit of measure remains static, both sides of the ratio are always changing.
The consumer price index “treats the money side as the fixed reference and books every movement against the goods,” he said. “That assumption is not a technical detail. It is the entire content of the statistic. If the dollar is the yardstick, then the yardstick cannot be short. A measuring system built on the currency is structurally incapable of registering what happens to the currency.”
And while the Austrian school of economics’ insistence on this point is often treated as pedantic, “[i]t stops being pedantry the moment you notice that the yardstick has an owner, and the owner has policy objectives.”
Sapozhnikov said CPI has another problem: The agency redefines and adjusts the internal weighting and calculations.
“In January 1983 the BLS stopped pricing owner-occupied housing by what houses cost and switched to rental equivalence—an estimate of what an owner would hypothetically pay to rent his own house,” he noted. “In 1996 the Boskin Commission concluded that the index overstated inflation by about 1.1 percentage points a year. The BLS then adopted geometric-mean formulas at the lower level of aggregation and steadily broadened hedonic quality adjustment, which discounts a price increase to the extent the product is judged better than the one it replaced.”
Sapozhnikov said these adjustments have their merits. “I am not alleging fraud,” he writes. “I am pointing at a pattern. Every major revision of the past forty years has lowered measured inflation relative to the method it replaced, and every one was adopted by the institution whose fiscal obligations—Social Security, tax brackets, indexed debt—are escalated by the resulting number.”
He argues that this is evident in the July report itself. “Shelter accounted for roughly two-thirds of the monthly increase, and the largest single component of shelter is not a price anyone paid,” he said. “It is imputed rent on houses that are not for rent.”
Gold, Sapozhnikov argues, has none of these problems. “There is no methodology board, no seasonal adjustment, no annual reweighting, no revision window,” he said. “Not because gold has a constant value—it plainly does not—but because nobody owns the definition. An ounce in 1932 and an ounce today are the same object. That is the only property required for the job. To audit a currency you need a reference the currency’s issuer does not control. Denominate the Dow in ounces and you get a series that no institution administers, adjusts, or has an interest in.”
Sapozhnikov then applies the Dow:gold ratio across history, and says the analysis lines up very accurately with key economic and market inflection points. “It swings between extremes, and the extremes mark the turning points of the twentieth century.”
“In September 1929 the Dow was worth about eighteen ounces,” he noted. “By July 1932 it was worth two. In February 1966 the Dow reached 995 while gold sat at $35 by statute—about twenty-eight ounces. By January 1980, with the Dow near 875 and gold spiking to $850, it was worth roughly one. In August 1999 the Dow crossed 11,300 against gold near $255: more than forty ounces, the highest reading on record. By 2011 it was back to about six.”
But then 15 years ago, the sequence broke. “From 2011 to 2024 the ratio drifted sideways and upward for twelve years, an unprecedented pause, while the Federal Reserve ran successive rounds of asset purchases and corporations bought back their own shares with the proceeds,” Sapozhnikov wrote. “The pause ended in February 2024. Since then the ratio has fallen from about nineteen to about twelve.”
This hides a stark reality from the average investor. “In dollars, his account is at a record,” he said. “In purchasing power over the one asset no central bank can print, he has given back a third of it since 2024. No brokerage statement reports the second number, and no inflation release will ever contain it.”
Sapozhnikov argues that the Dow:gold ratio is the true measure of inflation, and it also reflects the place where inflation shows up first, and strongest.
“Newly-created credit does not raise all prices at once and in proportion,” he writes. “It enters at specific points, and it enters first where the credit itself goes: into long-duration assets whose valuations hang on a discount rate. Equities, real estate, long bonds, and the ventures that only pencil out at low rates all inflate long before the effect reaches the supermarket. A consumer price index is therefore not merely an imperfect instrument for detecting monetary expansion. It is pointed at the wrong place. It measures the last stage of a process whose first stage is the whole story.”
Sapozhnikov said gold moves in opposition to this process because it is the only financial asset that is nobody’s liability. “It sits out the boom, which is why it looks like dead money for twenty years at a stretch, and it does the repricing when the boom unwinds,” he said. “The Dow/Gold ratio captures both halves in a single number: the numerator is the credit cycle, the denominator is the exit from it. The same four decades that produced those swings also produced a long decline in labor’s share of non-farm business output—the same redistribution, recorded by a different instrument.”
Sapozhnikov then offers a falsifiable test of the Dow:gold ratio.
“The lows of the completed cycles fall in a straight line: about two ounces in 1932, about one in 1980,” he said. “Roughly half a century apart, and each one half the last. Extend it and the current cycle terminates near half an ounce, some time around 2030.”
“If the ratio turns up from twelve and exceeds the 1999 high above forty without first reaching single digits, the thesis is finished—not weakened, finished,” Sapozhnikov states. “There is no reweighting available to me, no substitution effect to invoke, no revision window. That is the price of using a rod somebody else cannot rebuild, and it is a price worth paying.”
“The July CPI report told us the rod is behaving. It could not have told us anything else,” he said. “To learn what the rod is made of, you have to measure it against something no committee maintains.”
