Define Inflation

Krugman’s recipient piece in the New York Times has the following quote, “But that hasn’t been happening; yes, there’s a slight uptick in some U.S. inflation measures, but nothing out there that suggests an interest rate that is way too low in this macroeconomic sense.” as he discussed low interest rates and increasing asset prices.

It may be time to re-define inflation.  As Krugman notes in his column, “…the price of just about every asset category is now high by historical standards. Bond prices in “safe” countries are very high, which is the same thing as saying that interest rates are very low. But so are prices of risky sovereign debt — Paul De Grauwe points out that Spain’s borrowing costs are now the same as Britain’s. Corporate bond rates are low; stock prices are high; all across the board, assets are up.”

So asset prices are higher, but traditional measures of inflation are not.

Hmmm.   When a person’s assets increase, I see them spend more.  401K had a great year like 2013?  I guess you can afford the new car a year early.  That bond fund that you bought to generate income has now increased in value as well?  Pack the kids up, we are heading to Disneyworld.  Homes in your town are up 4% last year?  Tough not to incorporate that positive sentiment into your financial planning.

But much of that which we consume does not increase in price as fast as our assets.  BMW leases are lower this year than last year (due to the lower interest costs), flights to Orlando are cheaper now than last year even though fuel prices are up for the airlines.  My new laptop costs a lot less (and is more powerful) than the previous model.

The traditional measure of inflation looks at the money we spend year on year on certain items.  But maybe inflation needs to be re-examined.  I did not spend any more money this year, but I consumed a lot more in 2014 (so far) than in 2013.  So maybe inflation needs to be calculated as a percentage of disposable income?

I am not against the ability to get more by spending less.  I do benefit from the high asset prices and the low interest rates that have been in place the last few years.  But I believe that there are natural economic cycles; that there has to be bad times to have good times; that monetary and fiscal policy can not create an ever increasingly parabolic graph of economic growth.

And therefore if we continue to prime the pump (as Greenspan did through out the 90’s and early 00’s), we are due to have a harder fall when the bad times kick in (early 00’s and late 07 – 09).  If monetary and fiscal policy are “artificially” keeping interest rates low again, when is the next fall due and how hard will it strike?


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