Desert wrote: ↑
Tue Oct 19, 2021 5:13 pm
And CPI is the most accepted measure of inflation. Indeed, when we calculate inflation-adjusted returns, we adjust them using CPI, not a measure of money supply.
As I understand it, CPI is a measure of the change in price over time of a market basket of consumer goods and services.
So what about assets and asset price inflation?
CPI does not measure the change in prices over time of assets such as stocks, bonds, real estate, commodities and other assets.
If we ignore the recent supply chain related disruption to consumer goods and services, I would say we have seen a period of significant asset price inflation, but not a lot of CPI type inflation.
So is it fair to say the two types of inflation are disconnected?
Which one of the two would be most affected by money supply change, demand change, scarcity of goods, money velocity or interest rate manipulation?
IMO consumer prices would be most affected by scarcity of goods and changes in consumer demand, both of which we have right now, ostensibly as a result of the pandemic supply chain disruptions.
However asset prices may be more affected by money supply, money velocity and interest rate manipulation, which we have experienced in varying escalated degrees since 2009 and in the Greenspan years before that. Created money is chasing yield, and zero/near zero interest rates are forcing savers into risk assets but more importantly influencing cap rates which in turn influence valuations. I have had firsthand experience where the latter has had an undeniable and significant impact on commercial real estate valuations.
So when we look at a case study like Japan and say they've had no or little inflation, are we talking about CPI type inflation, or asset price inflation, or both?