Asset prices and inflation

(Note: This is an unedited draft of an introductory chapter from a manuscript on inflation. Not giving a detailed analysis, instead explain why I am interested in the relationship between prices. assets and inflation.)

My point of view follows the conventional economic view: asset prices are in a different category from the prices of consumer goods for current consumption, and since they behave quite differently, it makes no sense to them. gather. The Consumer Price Index in the United States no longer includes house prices, which is now the norm for developed countries. This reflects the desire for the CPI to reflect the cost of current production. Meanwhile, I generally use “inflation” as a shorthand for consumer price inflation, in accordance with the convention generally held by market commentators and economists.

I see two main reasons for opposing this view: the cost of living should factor in house prices, and the arguments that “inflationary policies” infiltrate asset prices.

Finally, house prices are believed to have been removed from the CPI as a tactic to deliberately reduce the measured inflation rate. I will come back to this topic later, when I deepen the discussion of house prices.

Cost of life

Given the importance of homeownership to the middle class worldview, it can be seen that it could be seen as a necessity. (Shelter is a necessity, and renting a shelter is an option – and the rent is included in the CPI.) Therefore, one could argue that the cost of buying a home should be included in the cost of living. And if we assume that the CPI reflects the cost of living (regardless of what economists and statistical agencies have to say), we end up with the position that house prices should be in the IPC.

Most of this chapter will revolve around the discussion of housing. I will summarize my arguments this way: even if we want to see the purchase of a house as part of the cost of living, we have to reflect the reality of the way houses are bought: with very large debts. Interest rates have collapsed since the early 1980s and house prices have risen as a result.

As for the prices of financial assets, linking them to the cost of living doesn’t make too much sense (except for someone setting up a trust fund).

Inflationary policies have resulted in asset price inflation!

Another common argument goes in the following direction: central banks have pursued inflationary policies (eg, “print money!”). What is happening is that the money is supposedly going to an obscure group that the speaker has an ideological complaint against, and they first drove up asset prices. Then “inflation” will seep into the prices of other goods and eventually show up in the CPI.

It fits an old theory about the inflation process, which is popular among Austrians on the internet. I’ll discuss this in more detail in the TK section. The immediate problem with this theory is that it does not match the observed data: we have had a generational bull market in almost every asset since 1980 (with a few bear markets mixed in), but inflation rates have plummeted and were then idle since 90s.

I am also somewhat cynical about this theory and its supporters. Many of those making these arguments predict inflation as a result of central bank policies – and were woefully wrong. In desperation, they’ve grabbed anything that has gone up in price and want to pretend that it backs up their prediction.

The reality is that there is a great subculture of people selling books, newsletters, and knickknacks, all based on protecting buyers of their wares from the evils of fiat currency inflation. As a writer, I know very well that I could probably sell a lot more books if I spoke verbally about the impending demise of major currencies in an episode of hyperinflation. (Granted, I might be doing this under a pseudonym.) Since the general public isn’t terribly fazed by the roughly 2% inflation that has prevailed since the early 1990s, it needs some sort of hook to get readers excited.