I strongly agree that it is a blunder to gauge the purchasing power of money solely by the costs of consumer goods and services–the CPI or CEP. But I don’t believe that the costs of financial possessions should be included in a way of measuring inflation. For real assets, I think that only the newly-produced ones should rely. In other words, I think that the GDP deflator, or something like it, is the least bad approach to calculating the purchasing power of money.
First, consider equities. If we believe that a talk about of stock is a claim to a fixed quantity of goods, then any increase in the price tag on a share would imply a lower purchasing power of money. However, guess that a company is likely to become as profitable twice. The price of a share would rise, but it could not be a higher price for the same quantity of future goods.
It will be a higher price for a higher level of future goods. Now, suppose the market interest should fall, and the low discount of future profits leads to higher prices of equities and existing long-term bonds. Superficially, the purchasing power of money is less. It is necessary to pay more for the same level of future goods. However, suppose we resided in a global world where in fact the only saving instrument was a keeping account. There is no likelihood of capital gain or loss on financial assets.
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