Asset Prices And Inflation

One of the more heated debates around inflation is whether asset prices should be included within the concept. House prices are the main area of concern since one of the usual characteristics of middle-class lifestyle within the developed world is homeownership. Financial asset prices – mainly stock prices – also pop up in the conversation.

(Note: This is an unedited draft of an introductory chapter from a manuscript about inflation. Not giving detailed analysis, rather explains why I am interested in the relation between asset prices and inflation.)

My view follows the conventional economic opinion: asset prices are in a different category than the prices of consumer goods for current consumption, and since they behave quite differently, it does not make sense to lump them together. The Consumer Price Index in the United States no longer includes house prices, which is standard for developed countries now. This reflects a desire to have the CPI reflect the cost of current production. Meanwhile, I typically use “inflation” as a shorthand for consumer price inflation, following the convention generally held by market commentators and economists.

I see two main reasons for objecting to this view: the cost of living ought to incorporate house prices and arguments that “inflationary policies” are seeping into asset prices.

Finally, there is a belief that house prices were removed from the CPI as a tactic to purposefully reduce the rate of measured inflation. I will return to this topic later when I dig deeper into the discussion of house prices.

Cost of Living

Given the importance of homeownership to the middle-class world view, one can see that it might be perceived as a necessity. (Shelter is a necessity, and renting shelter is an option – and rent is included in the CPI.) Therefore, one could argue that the cost of buying a home ought to be included in the cost of living. And if one assumes that the CPI reflects the cost of living (ignoring what the economists and statistical agencies have to say), one ends up at the position that house prices ought to be in the CPI. 

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Disclaimer: This article contains general discussions of economic and financial market trends for a general audience. These are not investment recommendations tailored to the particular needs of an ...

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