Peter Klein speaks my mind on CPI. Namely, CPI doesn’t immediately reflect the malinvestment facilitated by artificial credit expansion because it measures inflation for “ordinary” consumer goods. It does not readily capture asset price inflation in things like equities, commodities, and agricultural land.
My question now, however: Is it feasible to differentiate artificially-induced asset price inflation from those variances we should expect to see as supply and demand for various assets changes over time? David Ranson, for example, famously argues that CPI understates inflation and that commodity prices should be used to more accurately gauge the extent of monetary inflation in the economy. He writes:
Market analysts usually attribute changes in the prices of commodities – uniform, widely traded goods, such as metals – to higher or lower demand in major world economies, such as the United States and China. However, the price of a commodity also relates to the value of the currency in which prices are expressed, in most cases the U.S. dollar.
But I’m skeptical. Simply saying that the price of a commodity “also relates to the value of the currency in which prices are expressed” doesn’t tell us anything if we don’t know the extent to which a commodity’s price shifts reflect changes in supply and demand (“fundamentals”) versus changes in the money stock. Ranson doesn’t really answer this problem in his analysis, yet he proceeds to use the rising price of gold to indicate monetary inflation.