Inflation is Real but not Reported

The Governments measure of inflation is wrong, vastly understating its impact causing below average interest rates, leading to asset bubbles.

Inflation is defined as a quantitative measure of the rate at which the average price level of a basket of goods and services in an economy increases over some time period.

The problem with this definition and measure is that it excludes Assets. Consumers buy goods and services and Assets such as real estate and stocks.

The Government measures inflation using the Consumer Price Index (CPI) and reports it monthly.

It is a key variable central banks use to price money (interest rates). Using the Feds operating band, generally if inflation goes above 3% the Fed will raise interest rates (curtailing demand). It it goes below 1% they’ll lower interest rates (stimulating demand).

Although inflation is historically low as measured by goods and services (CPI), asset prices such as Stocks and Real Estate are near historically highs.

The table below illustrates inflated prices of USA Housing and Stock Prices, along with actual prices, using 1957 as a base year.  As an aside, clearly stocks outperform real estate in the long run.

Median Home Prices

Stocks S&P 500

Asset inflation has been substantially higher than the traditional government measure, and interest rates much lower than they should be, leading to higher higher and higher asset inflation and bubbles.

Why is this important?  We could go along way at preventing Asset overvaluation and bubbles by including assets in inflation calculations.  Real estate and stocks would be within the reach average consumers and bubbles avoided.

Copyright: jimosophy.com