With all this Money Printing, Where’s the Huge Inflation?

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by Wolf Richter, Wolf Street:

Oh, it’s here alright. But we’re a little squeamish about calling it out.

It constantly comes up: With all this central-bank money printing and the zero-interest-rate policies and the negative-interest-rate policies, and all these central-bank liquidity injections, in other words, with all these loosey-goosey monetary policies around the globe, why are we not seeing huge bouts of inflation?

And then, some folks take the next step and say: Well, since we’re not seeing big bouts of inflation, these loosey-goosey monetary policies should become standard, perhaps run by the government, instead of a central bank, and renamed Modern Monetary Theory, or whatever, because it will give us all this stuff for free and in terms of negative interest rates for better than free. This is finally the free lunch that we’ve been waiting for since the beginning of mankind.

But there is a fatal flaw in this logic. Turns out there are huge bouts of inflation, pernicious dangerous inflation. Here, inflation means that the dollar, the euro, or whatever other currency is losing its purchasing power. But this inflation is less focused on prices of consumer goods and services, but on prices of assets. This includes nearly all asset classes: stocks, bonds, residential real estate, commercial real estate, and so on.

Assets are highly leveraged. When their prices rise, these higher prices are used as collateral for more debt, meaning banks and bondholders are on the hook when prices turn the other way, as asset prices do. And this is when asset-price inflation leads to – you guessed it – a banking crisis and a broader financial crisis.

The term “inflation” can mean a lot of things. Here I’m not talking about “grade inflation” or “monetary inflation.” I’m talking about price inflation. Price inflation is when it takes more money to buy the same thing. There is no magic happening here. It just means the currency loses its purchasing power with regards to those things.

There are several types of price inflation, including:

  • Consumer price inflation, tracked by various measures such as the Consumer Price Index or CPI.
  • Wholesale price inflation, tracked by measures such as the Producer Price Index or PPI.
  • Wage inflation, tracked by various measures of labor costs, wages, and salaries
  • Asset price inflation.

In the US, we’re little squeamish about the phrase “asset price inflation.” When a house sold for $200,000 in 2014, and in 2019, the same house sells for $300,000, it doesn’t mean that the house grew 50% in size or got 50% more opulent or whatever. Nope, the house stayed kind of the same, it just got a little older. But what it means is that the dollar with regards to this house lost much of its purchasing power. It now takes $300,000 to buy the same house that five years ago $200,000 could buy.

As homeowners, we would like to think that some magic happened here, that we got something for nothing, when in fact, we own the same house, but now it takes a lot more dollars to buy the house because the purchasing power of the dollar with regards to housing has gotten crushed.

None of the home price indices we commonly use in the US are called “home price inflation index.”

But not every country is so squeamish about calling a spade a spade, when it comes to home price inflation. For example, the UK government’s Office for National Statistics calls its data and indices for house prices, “Monthly house price inflation.” And it says: “House price inflation is the rate at which the prices of residential properties purchased in the UK rise and fall.”

Between January 2013 and December 2018 – so over a period of six years – house price inflation as defined by the UK government was 37% nationally, and 52% in London.

Over the same six-year period, house price inflation in the US was 42%, according to the Case-Shiller index. And by metro area, it was 58% in the Dallas-Fort Worth metro, 65% in Denver, 78% in the Seattle metro, and 82% in the San Francisco Bay Area.

This just means that it takes a heck of a lot more dollars than six years ago to buy the very same house. No magic here.

When it comes to stocks, the picture of asset price inflation gets a little more complex, because, unlike houses, companies do grow. Their revenues go up and their earnings go up, and these elements are not related to asset price inflation.

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