AMAAAZING

I love this guy; we were fellows together back in Mises times -- he much more academically successful than me, and his Oxford degree in maths instead of my pesky econ history.

Anyway, here's a great piece about the CPI and how to/whether to include assets in the price index (#1422896, #896143):

The median-priced home in America now costs $440,600, while the median household earns roughly $84,000 a year. That gap has left a growing share of Americans priced out of buying altogether, while those who already own homes and hold stocks have watched their wealth compound. The renter-owner wealth gap is now the widest on record. Meanwhile, equity markets keep setting new highs.

"None of this, officially, counts as inflation."

Hot damn.

The price of stocks, homes, and other assets essentially does not appear at all in conventional inflation measures.

The idea is old: consumer price indices are for consumer goods, not assets. Alchien calling (#1422896):

Haberler showed that the standard price indices economists use — Laspeyres and Paasche, and averages of the two — can be trusted as measures of an individual’s true cost of living only under a specific set of assumptions about that individual.

1. PURE consumer: spends the whole of their income on present consumption, end of story
2. ??? (Not sure what the other fundamental assumption was...)

Shocking graph, eh, but not a surprise to anybody here

That exclusion made the CPI theoretically coherent — it’s meant to measure consumer spending, after all. It also means that some of the fastest price inflation in the American economy over the past three decades has been completely invisible to the number the Federal Reserve targets (the PCE price index) and the media reports (the CPI).

This is crazy

From 1959 through 1994, M2 grew at 7.2 percent a year, against real GDP growth of 3.5 percent and CPI inflation of 4.7 percent — a combined 8.2 percent. The gap was slightly negative: roughly 1.0 percentage point a year. Money growth, if anything, ran a bit behind the pace of real economic growth and consumer price inflation combined.

"Since 1995, the picture flips."

M2 has grown at 6.2 percent a year, while real GDP and the CPI have grown at 2.5 percent per year each — a combined 5.0 percent. The gap is now a positive 1.2 percentage points a year, a swing of roughly two full points from the prior 35 years. 
That is not a rounding error compounding harmlessly in the background. Over three decades, a persistent 1.2-point annual gap compounds into a very large sum of money that was created by government, but not absorbed by real output growth. By definition, it did not show up as measured consumer price inflation.

...and the money flowed into assets. Shocker:

In an economy where basic consumption needs are largely saturated for a large share of households, additional liquidity is more likely to flow into savings and investment vehicles, such as stocks and real estate, than into proportionally higher demand for groceries and clothing.

a persistent, multi-decade gap between money creation on the one hand and real growth plus consumer price inflation on the other is exactly the kind of monetary overhang that should show up somewhere. In a consumption-saturated economy, the most likely place for it to show up is in the price of the assets the CPI was never built to measure.