Thoughts on Inflation and a Financial Price Index (FPI)

1/ Been thinking a lot about inflation recently and why the so called Consumer Price Index (CPI) shows there’s been no excessive inflation over the past decades, even with all the central bank QE, stimulus and low rates.

2/ I’ve been mulling over the idea of creating an FPI - a Financial Price Index to counter balance the CPI

3/ Rather then measure consumer goods like the price of eggs and clothes, The FPI would be a measure of all financial assets:

Real Estate, Stocks (public and private), Bonds, Insurance and Social security etc

4/ When central banks print money and lower rates, the stimulus effect mostly flows to financial assets over consumer assets. And thus inflation as reported by CPI is low b/c the stimulus money never made its way into consumer pockets to push up the price of eggs

5/ Further, manufacturing economies of scale and modern technology have enabled us to lower the cost of production for many of the goods in the CPI basket (who doesn’t love a good $6 Costco chicken?) So the CPI is further suppressed by lower cost of goods sold

6/ Finally, technology is having the net effect of displacing previously profitable sectors of the economy. For example, the paper map industry is kaput thanks to the introduction of Google Maps.

7/ Where people previously spent money and increased GDP when buying maps, the net effect of google maps could be negative on GDP.

8/ If we indexed inflation on a basket of financial goods, the REAL rate of reported inflation would be significantly higher.

9/ Perhaps then we’d realize the true value of the dollar and better understand the real effects of endless Central Bank Money