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What exactly is your definition of “real inflation”? If you’re including the prices of financial assets then you are using a nonstandard definition of inflation

What exactly is your definition of “real inflation”? If you’re including the prices of financial assets then you are using a nonstandard definition of inflation.

roenxi 7y ago
Persistent decline in the purchasing power of money. I forget the technical definition of a 'good', but I count assets as part of 'goods and services' that people want to purchase. Anyway, if the technical definition of inflation is only consumer goods, that shouldn't be the focus when talking about QE. If we are creating money we should focus on what that money is being used to purchase. If inflation is only going to be consumer goods then the main threat of QE obviously isn't inflation because it isn't being used to buy consumer goods. The risk is nobody being able to afford non-consumer goods like houses and other financial assets needed for retirement. My motivation is knowing how much my salary is worth in assets, because I don't spend most of what I earn and I think the political situation would be a lot more stable if everyone got to retire into their own home without having to spend years paying for a banks endorsement that they are worthy to own a home. I dunno, what do you want to call the steady erosion of purchasing power? We have to adjust asset prices by something to account for expected change caused by creation of new money. My understanding is people use CPI, which is not a good choice for reasons under discussion - the CPI isn't capturing the effects of QE.
- esoterica 7y ago
  The cost of housing is included in the inflation number via rent, not house prices. Rent is the true cost of housing; when you purchase a house you are not only purchasing shelter but also a speculative investment that you expect to appreciate. Only the former is relevant to cost of living. > The risk is nobody being able to afford non-consumer goods like houses and other financial assets needed for retirement. You need to buy financial assets for retirement only so they can be later exchanged for non-financial goods like good and gas. Only the latter prices are relevant to you. It makes a difference whether you pay $1 or $10 for gas, but there is zero difference between buying stock at $100 and selling it later at a X% return, and buying stock at $1000 and selling it later at an X% return. The future rate of return might be relevant for your retirement, but that is both outside the scope of inflation and not proxied by the current asset price increases (which is what you are claiming inflation is supposed to also measure).
daxorid 7y ago
I don't know what a good yardstick would be, but CPI is definitely not it. US CPI weights the entire Medical Products & Services category at 8.68% vs its actual weighting of 18.1% as a fraction of GDP. The average price of a new vehicle hasn't materially changed in 22 years in the CPI due to hedonic adjustments, whereas the actual sticker price is 55% higher.

What exactly is your definition of “real inflation”? If you’re including the prices of financial assets then you are using a nonstandard definition of inflation.

roenxi 7y ago

Persistent decline in the purchasing power of money. I forget the technical definition of a 'good', but I count assets as part of 'goods and services' that people want to purchase. Anyway, if the technical definition of inflation is only consumer goods, that shouldn't be the focus when talking about QE. If we are creating money we should focus on what that money is being used to purchase. If inflation is only going to be consumer goods then the main threat of QE obviously isn't inflation because it isn't being used to buy consumer goods. The risk is nobody being able to afford non-consumer goods like houses and other financial assets needed for retirement. My motivation is knowing how much my salary is worth in assets, because I don't spend most of what I earn and I think the political situation would be a lot more stable if everyone got to retire into their own home without having to spend years paying for a banks endorsement that they are worthy to own a home. I dunno, what do you want to call the steady erosion of purchasing power? We have to adjust asset prices by something to account for expected change caused by creation of new money. My understanding is people use CPI, which is not a good choice for reasons under discussion - the CPI isn't capturing the effects of QE.

esoterica 7y ago
The cost of housing is included in the inflation number via rent, not house prices. Rent is the true cost of housing; when you purchase a house you are not only purchasing shelter but also a speculative investment that you expect to appreciate. Only the former is relevant to cost of living. > The risk is nobody being able to afford non-consumer goods like houses and other financial assets needed for retirement. You need to buy financial assets for retirement only so they can be later exchanged for non-financial goods like good and gas. Only the latter prices are relevant to you. It makes a difference whether you pay $1 or $10 for gas, but there is zero difference between buying stock at $100 and selling it later at a X% return, and buying stock at $1000 and selling it later at an X% return. The future rate of return might be relevant for your retirement, but that is both outside the scope of inflation and not proxied by the current asset price increases (which is what you are claiming inflation is supposed to also measure).

daxorid 7y ago

I don't know what a good yardstick would be, but CPI is definitely not it. US CPI weights the entire Medical Products & Services category at 8.68% vs its actual weighting of 18.1% as a fraction of GDP. The average price of a new vehicle hasn't materially changed in 22 years in the CPI due to hedonic adjustments, whereas the actual sticker price is 55% higher.