The problem with what is commonly thought of as inflation is that consumer prices move up and down for many different reasons and, at any one time, there will be prices rising somewhere and falling elsewhere.
So, what prices should be checked by the compilers of the statistics?
The answer, inevitably, contains much subjectivity because the prices of every good and service in an economy cannot be monitored all the time.
This begs the question of what use measurements of consumer price movements are in the first place.
Mark Mobius, the emerging markets investment pioneer, has recently published a book titled “The Inflation Myth and the Wonderful World of Deflation.”
In it, he argues that consumer price inflation measurements are severely flawed, a central reason being that no account is taken of changes to the quality of the good or service, or innovation generally.
In the past – nominal prices might have stabilized for personal computers and TVs, for example, but the product has been so much better year-after-year.
Despite these inherent flaws, consumer price inflation is arguably the most important economic statistic on the planet because it directly influences the level of central bank interest rates which, conventional thinking would have us believe, affects the overall economy.
However the broad economic path is driven by trends in mood. Mood can influence consumer prices, but it mainly drives asset prices and debt.
Yet the money and debt-inflation of the past decade is far more important than consumer price measurements.
Today we see monetary policy causing market participants to bid up asset prices such as debt, equity, and real estate.
What comes after this artificial asset price inflation?
Yes. Asset price deflation.