Life After Full-time Work Blog

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#120 We’ve Experienced Huge Inflation

But the traditional measures ignore it


I got some nice personal emails in response to the previous post on retiree inflation – thank you to all concerned. So I thought one more post on inflation might be timely – though be warned, this is advanced stuff, and deals not with something relating to any individual but instead to a discussion of the economic world around us.


Inflation means getting bigger, expanding, growing. When it’s applied to prices, it means prices are going up. Nothing new or controversial there.

So, to make my point, I’ll start in a different place, a very unexpected place. It’s about accountants, particularly the notion that they’re boring. I remember several Monty Python episodes along those lines, including one in which an accountant wants to be a lion tamer. His vocational guidance counsellor tries to put him off, identifying him with a set of characteristics that are cringingly offensive, adding: “And whereas in most professions these would be considerable drawbacks, in chartered accountancy they are a positive boon.”[1]

And if you think that’s either terribly insulting or terribly amusing, you obviously haven’t heard the one that I encountered, as an actuary: “An actuary is someone who always wanted to be an accountant, but never had enough personality.” Wow, how low can you get!

In fact I recall an occasion in the 1980s when I was on the Board of Governors of the Canadian Institute of Actuaries (the CIA, as we were sometimes called, to our amusement), and also its Vice-President for Pensions. The corresponding accounting body at the time, the CICA (Canadian Institute of Chartered Accountants), was about to hold hearings on its rules on accounting for corporate pension plans, and invited me to be its first witness. After I testified, to commemorate the occasion the CICA presented me with a CICA tie. Well, I wore it to the next meeting of the CIA Board, and while none of the other board members noticed my tie, some did comment on the new sparkle in my personality! Perhaps that’s why I have always respected accountants.

Which is a roundabout way of saying that we have something relevant to learn from them, on the subject of this post.

When they compile the financial accounts of an enterprise, accountants look, of course, at all the things the enterprise has spent money on. Are these all “expenses”? Actually, no. The expenditures that were aimed at improving the current position of the enterprise and generating revenues in the current accounting period are indeed “expenses.” But the expenditures that are aimed at improving the future position and generating future revenues are classed as “assets” and go into the balance sheet, not into the profit-and-loss statement.[2] Another way to put it is: that money hasn’t really been spent in this period, it’s been invested for the future. And that future benefit is only gradually brought into the future profit-and-loss (by a process they call depreciation).

That’s the distinction that I think we’re missing with the way we think about inflation.

I don’t mean to push this analogy too far. All I’m saying is that, when we spend money, some of it is spent on things we benefit from in the short term, and other things are for our long-term benefit.

So let’s take this in stages.

(1) Lots of new money: We know that huge amounts of money have recently been poured into the economies of our countries.[3] And commentators expected that that would inevitably result in much higher inflation. Why? Because they agreed with Milton Friedman (1912-2006), a world-famous and Nobel-Prize-winning (1976) economist, who said many years ago that “inflation is always and everywhere a monetary phenomenon.”

Well, here’s tons of added money poured into the system, to alleviate the covid-19 pandemic.[4] Where’s the resulting inflation? Month after month, the Consumer Price Index (the CPI) and its equivalents in other countries show almost no price inflation at all. Was Friedman wrong? Where has the money gone?

It’s clear that there has been no huge increase in demand for consumer goods and services, which is what would have pushed the CPI way up. Again: where has the money gone?

(2) Where the money has gone: As accountants would remind us, there are lots of things to spend money on, some short-term-oriented and some set aside for our future benefit.

What seems to have happened is that we’re not spending noticeably more on current consumption.  Indeed, with the covid-19 pandemic, the fear has been that both supply and demand would fall precipitously. It turns out that the new money has (almost) sustained spending: most economies have shrunk, but not by nearly as much as they would have done without the new money.

But there has also been another destination for the money. A lot of it has gone into assets: capital market assets like stocks and bonds, and homes. And it’s clear that, in most of the world’s largest economies, those asset prices have risen. They’re typically higher than they were at the end of 2019, despite the pandemic. In fact current commentary focuses on attempting to explain how stock markets could possibly be at their current levels when the pandemic has ravaged the economy: are buyers crazy?

(3) There’s a logic to increased asset prices: No, the buyers are not crazy.

First, the pandemic’s adverse economic effects have been reduced by the flood of new money. But there’s also another reason.

Interest rates are artificially low, to help governments support all the new debt that they have undertaken. (I’ve likened the low interest rates to new taxes on savers.[5]) Those low interest rates should naturally lead to an increase in the present value of future asset cash flows (like stock dividends and bond interest and maturity payments) – and, as we see, they have done exactly that. Regardless of the impact on the real economy, a rise in asset prices is a natural consequence of lowering interest rates.[6]

(4) So what about the CPI? This is my point. All that new money in the economy hasn’t gone into current expenditures – the goods and services that the CPI attempts to measure; much of it has been invested in assets, which will enable us to generate future spending.

Actually, the CPI makes a valiant attempt to include some longer-horizon spending. For example, while the housing component of CPI easily reflects rent changes, it’s not obvious what to do with owner-occupied housing. Some countries try to use rental equivalents, mortgage-related changes, new construction costs, and so on. Other kinds of longer-term spending, including some forms of consumer durables like cars and refrigerators, are included as if we get the full benefit in the year of purchase.

These are imperfections, and would interfere with any attempt at precise equations in a theory. That’s not my point.

My point is that we have indeed experienced huge inflation. But the CPI measure doesn’t capture it, because it’s designed to reflect current consumer spending. So our investment in assets only impacts the CPI very gradually. Yet the CPI is the only way in which we think of inflation, and that’s why we conclude that there hasn’t been any noticeable inflation. There has been, in asset prices.

(5) So, does this imply future high CPI inflation? That depends. The way the government has created the new money is to issue bonds that become increased government debt, and they also own the same bonds, which they have then distributed as new money to all kinds of recipients.[7] If they decide to reduce their debt, they’ll have to do it either by increasing tax rates or very gradually by collecting expanded tax revenues from the ultimately expanding economy. Commentators suggest that they’ll be very reluctant to increase tax rates; politically it’s far more appealing to hope that they can achieve gradual reduction of the debt over the years via a gradually expanding economy (a sort of natural depreciation!). What might upset that, of course, is if current spending starts to increase rapidly, which would lead to rising inflation, which would (probably) lead to rising interest rates, and the debt would become unsustainable.[8]

(6) A side issue: There’s a big social consequence too. Those who are worse off have obtained some benefit, it’s true, from the huge amounts of money poured into our economies, because their pay has been somewhat sustained by it. But that’s a short-term benefit, and by and large they’re not the ones who have been able to noticeably increase their assets.[9] Most of the benefit has gone to those who can afford to have a long-term perspective, by holding those inflated assets – and they are mostly the better-off in our society. So, although there has been a sort of floor built for everyone, the better-off have not only been sustained, but have been lifted up further. That increases the inequality. But that’s a separate issue. It doesn’t change the facts about inflation.



We’ve had huge inflation, but in asset prices, not in consumer goods and services.


[1] Wikipedia says: Vocational Guidance Counsellor is a Monty Python sketch that first aired on December 21, 1969 in the episode “Episode 10”. The sketch is credited with creating the popular stereotype of accountants being boring. Four decades later, the Financial Times reported that it still haunts the profession.

[2] As you can guess, I’m over-simplifying. I just want to make the point that some expenditures are treated as assets for future benefit.

[3] There are two ways in which this happens. The way that has become traditional is for governments to run budget deficits; this is called fiscal policy. The relatively new way is for central banks to lead the way, through expansionary monetary policy.

[4] This is, as economists would point out, too simple an angle. Money also flows in from other countries, and also flows out to other countries, and the amounts don’t match, so there’s invariably some net positive or negative effect. But I’m not trying to develop mathematical equations here. I’m just looking at directional impacts. The money created within a country tends to be very much bigger than across-country additions or subtractions.


[6] Of course, if the pandemic causes a recession, that will lower stock prices. (Typically the fall in prices precedes the recession, anticipating it.) But that’s a separate effect from the impact of lowering interest rates.

[7] Again, an over-simplification. Bond dealers and the central bank are involved too. But for practical purposes I’m treating the central bank as an arm of the government, at least for this purpose, though both parties would protest that that’s simply wrong.

[8] In fact, modern monetary theory (MMT, as it’s known colloquially) says that there’s no need to worry about the increased government debt as long as inflation stays low. This is a very controversial stance – but that’s beyond the subject of this blog post.

[9] Some have increased their net worth by paying down debt or saving money in short-term emergency accounts.


I have written about retirement planning before and some of that material also relates to topics or issues that are being discussed here. Where relevant I draw on material from three sources: The Retirement Plan Solution (co-authored with Bob Collie and Matt Smith, published by John Wiley & Sons, Inc., 2009), my foreword to Someday Rich (by Timothy Noonan and Matt Smith, also published by Wiley, 2012), and my occasional column The Art of Investment in the FT Money supplement of The Financial Times, published in the UK. I am grateful to the other authors and to The Financial Times for permission to use the material here.

6 Responses to “#120 We’ve Experienced Huge Inflation”

  1. Mike Clark says:

    I have come at the inequality issue from a different direction, Don.

    We both might agree that the average pension saver and Larry Fink are in the same asset rich bucket, the guys who have benefited. I think the current spending of many (others) has been hindered by reduced earnings during the pandemic so the “divide” between the haves and have-nots (in income terms) has widened. Clearly political, and arguably exacerbating the current populist stuff. Despite their original pitch, neither Boris not Trump have tackled this.

    I think I have mentioned I am focusing some thinking (and action!) on the state’s balance sheet (govt as Chief Risk Officer). After finding a bit of HMTreasury doing Contingent Liabilities (not enough, but a good start), I turned to the Office of Budget Responsibility (brief: Fiscal Rectitude across the street at HMT), linked them with the Climate Change Committee and am seeing where that goes. Goal: better mgmt of UK balance sheet in respect of climate risk.

    Another piece of this narrative/puzzle is the degree to which the Bank of England/Prudential Regulatory Authority climate scenario work is constrained to being positive because normative would be seen as critical of government policy. So I may need to weave the IPR FPS (Inevitable Policy Response climate Forecast Policy Scenario) into the OBR/CCC conversation because they CAN be normative.

    Deep waters (but rising!).

    • Don Ezra says:

      Thanks very much, Mike. You’re right in the midst of all of this, so your comments are particularly insightful. I’m not nearly up to date on the activities you mention, but I love the way you put those two groups together! Strange how often it happens that groups work independently of the existence of others.

  2. jj woolverton says:

    Don, your Blogs are the highlight of my days. Lets you know how my days are going. Love them as they are always thought-provoking. By the way, that Monty Python skit is one of my favourites.

    My definition of inflation is the process of living in a more expensive neighbourhood without moving.

    There are two types of inflation: “demand-pull” (which is what you get when there is a lot of money entering the system), and, “cost-push” (which occurs when, let’s say, commodities, such as oil or a tight labour force market, place upward pressure on inflation rates. Two very different and distinct impacts on inflation.

    With your “stage (1)”: huge sums of money have indeed been poured into the various economies, however, the monies have not been for investment nor to increase productivity. Economic growth is dependent on labour growth and productivity. These bailouts have affected neither one — hence, the lack of any impact on inflation. We are actually fortunate that inflation is not below zero at this time. The monies being allocated by the various federal and local governments are pure bailouts for specific corporations significantly affected by the pandemic (e.g., the airline companies) and individuals who have been laid off or furloughed due to the lockdowns or lack of demand. There is no new money in the system, just money coming in from a different source. It is a zero-sum game. Individuals are not better off (in fact, most are worse off as the bailout monies are less than what they were making working). As well, for corporations, some of the monies were actually used to buy back their shares (not increasing investment in the economy), while, as you state in your notes, some of the monies for individuals went to pay down debt. The problem: we have an artificially inflated economy now. The bigger problem: monies will have to be paid back at some point. Once again, no new money in the system, so no impact on inflation.

    Another problem with the CPI as a measure of inflation is that the “basket” is a guess as to what consumer habits will be based at the time the basket was created. Human habits change faster than the CPI. As a current example, anyone undertaking construction projects at this time are likely to be paying up to a half more on their quotes than they were a year ago due to the lack of supply and increased demand. This is not reflected in the current CPI data.

    As far as inflation in the stock market, it has significantly outperformed the CPI, and, as you have pointed out, has created a wider gap between the “haves” and the “have-nots”. This has all been due to demand-pull inflation — and maybe a lot of investors not paying attention to valuations. The market has been very concentrated and may not be reflective of the real reality. Stocks are now yielding more than bonds which has changed the risk profile. The outlook for earnings is the majority of the market has not changed — the biggest change being in the valuation being put on these earnings.

    I can now hardly wait for your thesis on the “dependency ratio” and its impact on both interest rates and inflation.

    Don, just read this over again and not sure it adds anything to what you have stated, however, decided to send it anyway.

  3. Don Ezra says:

    From Tom Philips:
    The other way to think about asset price inflation is that it is the logical outcome of a decline in expected future returns, as a consequence of which investors should expect to earn much less from their assets going forward. This is obvious in the case of bonds (current yields are low, and the high prices of bonds reflect this downward shift) but less so in the case of stocks (P/E’s are high, which can be shown to imply a low prospective return). Consequently, investors will have to translate assets into income partly from yield and partly from asset sales. In the extreme case when yields are negative, ALL of the translation from assets to income must come from asset sales.

    • Don Ezra says:

      Thanks very much, Tom. This adds a further level of understanding. Your point about the increased need to sell assets in order to generate income is a particularly practical one.

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