"Anyone with a web browser knows that home prices have experienced a monumental increase."
An asset cannot experience inflation. The word inflation suggests something that loses values. A home that gains in value is clearly not suffering inflation, rather, that is the opposite of inflation.
If you earn $200k a year, and there is 5% consumer inflation, and a year later you still make $200k, then in a sense you are 5% poorer.
If you've a house worth 200k and its value goes up 5%, then a year later you are 5% wealthier.
We might joking and informally refer to "asset inflation" but please remember, under any formal model, there is no such thing; it would be a contradiction in terms.
Are you really 5% richer, if realizing that appreciation means selling the house, and buying a comparable one on the market that has also appreciated 5% in value? Plus, depending on your locality, your property taxes went up due to the new valuation. The only way you're unlocking that value is if you sell the appreciated asset for some good/service that hasn't gone up in value, say, televisions. Otherwise, you're just trading it for other expensive goods and your purchasing power hasn't changed.
I'd argue even if absolutely all housing went up 5% in value, everyone is still at least a little richer (albeit not effectively 5% richer and mostly on paper still).
Most people buy a house with a down payment. A conventional down payment is 20%. If you bought a house for $100,000 (with $20k down) and it's now worth $105,000. You can now sell the house, and put $25k down on another house, which means you can now qualify for a $125,000 house. For simplicity I'm ignoring principal that had been paid down on the first mortgage and transactional costs.
Those are all valid concerns, but unrelated to the conceptual issue of whether an increase in the nominal price of an asset can be coherently understood to be a form of "inflation."
>If you've a house worth 200k and its value goes up 5%, then a year later you are 5% wealthier.
That doesn't follow. A nominal rise of 5% doesn't make you 5% wealthier. Asset PRICE inflation is a real thing. You're conflating value appreciation and depreciation (rise or fall in real value) with price inflation/deflation (rise or fall of nominal value).
Houses are not consumer goods, they are assets, like stocks on the stock market. If the stock market goes up 2%, we do not make a habit of saying "Terrible news today, the stock market suffered 2% inflation."
This sentence is unmanageable:
"You're conflating appreciation and depreciation (rise or fall in real value) with inflation/deflation (rise or fall of nominal value)."
First of all, I'm explaining the government's definition of consumer inflation, which you seem to misunderstand. The government does not formally model rising asset prices as consumer inflation, the government models that increasing wealth.
Second of all, you're conflating nominal appreciation and nominal depreciation with the concept of the "real," which is to say, inflation adjusted value. If the value of your house increases by 5% then you are 5% wealthier. Whether this has kept up with the pace of inflation is a separate issue. We need to talk cleanly and cogently about nominal value versus real changes in value. You can do that by adjusting your changing value of wealth by the consumer inflation, but clearly you cannot do that mental adjustment if you're trying to base the calculation off the real value of your assets -- in that case you would be double counting the inflation.
To put that differently:
Suppose your house increases a nominal 5% and consumer inflation is 6%. You might say "Oh, I'm 1% poorer in real terms." But you can't say that if, as you seem to want, asset values are included in the calculation of consumer inflation. In other words, if the 5% increase is already part of the 6% increase, then you've mushed the concepts together to such an extent that the calculation becomes meaningless.
>Suppose your house increases a nominal 5% and consumer inflation is 6%. You might say "Oh, I'm 1% poorer in real terms." But you can't say that if, as you seem to want, asset values are included in the calculation of consumer inflation. In other words, if the 5% increase is already part of the 6% increase, then you've mushed the concepts together to such an extent that the calculation becomes meaningless.
You've mushed them together, not I. We were talking about asset price inflation, and then you tried to mush it together with consumer inflation.
On the whole you are right and no disagreement from me. The measure of inflation uses shelter though so rising home purchase prices generally means that when those same house purchased at a higher price are rented out the price they rent for is likely going to be higher, raising costs for non owners. So yes, you are correct but rising home prices while a good thing for the owners that got in before the prices rose is not a good thing for anyone else. With that said I am a home owner that is happy my house has increased in value but at the same time, it generally means nothing to me as if I wanted to move I would have to buy another house that has increased in value as well. Its only positive return for me is if I take out a loan on the house it allows me a lower LTV and subsequently a lower interest rate on that loan.
Absolutely true, and I was in no way suggesting that rising prices for homes was good or bad. I've tried to stay neutral on that issue. The point, which is important to this conversation, is that nominal increases in the price of an asset cannot coherently or conceptually be understood as a form of "inflation."
The phrase "asset inflation" is one that we can use jokingly and informally, but formally it would not make any sense in any real attempt to judge changes in the standard of living.
By contrast, these are all valid questions:
Are wages going up faster than the nominal price of homes?
Is labor productivity going up faster than the nominal price of homes?
Is the share of national income going to labor increasing or decreasing?
Is asset wealth increasingly held in liquid or illiquid forms?
Is average rent going up faster than average wages?
Your nominal profit is 5% and your real profit is 0%, good point, but unrelated to the conceptual issue of whether an increase in the nominal price of an asset can be coherently understood to be a form of "inflation."
But housing costs money. If you're a homeowner, if you bought a house for $250k in 2019 vs. a homeowner who bought an identical house for $300k in 2021, its pretty hard to argue the second homeowner isn't comparatively worse off.
Of course, houses have to be maintained. At least where I am, the cost of plumbers, electricians, HVAC, etc. have exploded in the last 18 months.
Renters are a much more straightforward case. The costs of housing (i.e. the costs of purchasing and maintaining the asset) are passed on to them in the form of rent increases.
While your concerns are valid, that is simply not the definition of consumer inflation. Houses are not consumer goods, they are assets, like stocks on the stock market. If the stock market goes up 2%, we do not make a habit of saying "Terrible news today, the stock market suffered 2% inflation."
>we do not make a habit of saying "Terrible news today, the stock market suffered 2% inflation."
If the real value of the underlying equities/assets of the market stay the same but the nominal price goes up 2%: As a cash buyer I would absolutely say "terrible news today, the stock market suffered 2% price inflation today."
Just because the government doesn't put that into the "consumer inflation" figures doesn't mean it doesn't look like inflation to me as someone who may desire to own certain equities.
The word "real" has no meaning in this sentence unless you've first developed a concept of consumer inflation that is separate from asset values increasing. If you say that asset "inflation" should be a component of the consumer inflation that the government measures, and therefore consumer inflation includes the increase in the value of homes, then the word "real" has no meaning. You cannot say "Houses went up 5% but inflation also went up 5%" if the 5% increase in homes is already counted in the 5% inflation. You are mushing these concepts together and creating a conceptual mess.
>If you say that asset [price] "inflation" should be a component of the consumer inflation
First of all I never said that, because by definition they are two separate things.
Asset price inflation refers to a fixed quantity of currency buying less and less real assets. Consumer inflation refers to a fixed quantity of currency buying less and less of the basket of consumer goods and services.
You keep confusing yourself by sometimes mushing the concepts inflation, asset price inflation, and consumer inflation and then getting upset when one doesn't fit neatly into the other. You are mushing these concepts together and creating a conceptual mess.
You can play this disingenuous game all day where you mix the 3 concepts around, and yet at the end of the day asset price inflation will still be real.
What is a real asset? If by "real" you mean "adjusted for inflation" then, again, you are double counting the inflation. If by "real" you mean "an object with a clear category and a clear value" then I'm curious how you would derive the clear category and the clear value? If one person says "I hate that house, I would only pay $300k for it" and another person says of the same house "I love that house, I would pay $600k for it" then who is correct?
If you want to have a sane conversation about this, I would suggest that you stop using the word "real." Use "inflation adjusted" if you mean that, and then use "actual" or "countable" when you mean those things.
About this:
"You keep confusing yourself by sometimes mushing the concepts inflation, asset price inflation, and consumer inflation and then getting upset when one doesn't fit neatly into the other."
I am not upset with you, nor did I say anything to suggest that I was upset with you. I'm simply pointing out that you don't seem to understand the words that you are using.
Also, I've avoided bringing politics into this, but it might be worth thinking of some of the notorious incidents of hyper-inflation, the political effects it had, and how such effects are simply not rational or possible or connected to increasing nominal prices for assets. I wrote about the late Soviet era hyper-inflation here:
There are different classes of assets but when I refer to real asset inflation it refers to real assets. I use real assets here since we are talking about houses. So to your question:
> If by "real" you mean "adjusted for inflation" then, again, you are double counting the inflation. If by "real" you mean "an object with a clear category and a clear value" then I'm curious how you would derive the clear category and the clear value?
I don't precisely mean either in regards to "real assets", see below.
>What is a real asset?
"Real assets are physical or tangible assets, such as infrastructure, real estate, natural resources and precious metals, whose value is based on their physical properties or utility." [0][1][2]
If I said "actual" or "countable" assets it would most definitely not have the same meaning. IOUs friend bill or a dollar bill are both actual and countable assets but not real assets.
>I would suggest that you stop using the word "real."
OK but to do so I'm going to need to see lkrubner's personal dictionary, since we are dispensing with the terms used in the financial industry.
>I hate that house, I would only pay $300k for it" and another person says of the same house "I love that house, I would pay $600k for it" then who is correct?
You can argue who is correct but when a house is for sale
the title is generally transferred to the highest bidder, all else equal. It really doesn't mean dick if I walk up to a house for sale and tell the owner I think it's worth $1000 bucks, nor does it mean anything if I think it's worth $1M and never pony up the money. When on a macro level we see the executed transaction for similar houses trend towards a price, it's safe to say the market roughly values houses similar to that house near that price.
>If by "real" you mean "adjusted for inflation" then, again, you are double counting the inflation.
Today I own one drill press as a capital for my manufacturing business. Tomorrow the .gov prints 1 quadrillion dollars. Tomorrow drill presses aren't any harder to come by nor harder to make nor any more or less useful for industry or for me or anyone else. The price inflation still rises. You can single, double, or triple or even fractionally count your idea of inflation in whatever made-up definition soup you want to conjure up, but the price inflation from more magic dollars entering circulation will still be there.
Interesting read. My take based on your writing is we should remove the money supply from the government, and instead decentralize as best we can to minimize the bad acts of a few actors. Widespread adoption of commodity money and privately issued notes (both fiat and asset backed) are a couple ways to reduce the influence of a single powerful government from having full control of the money supply.
"Today I own one drill press as a capital for my manufacturing business. Tomorrow the .gov prints 1 quadrillion dollars. Tomorrow drill presses aren't any harder to come by nor harder to make nor any more or less useful for industry or for me or anyone else. The price inflation still rises."
Future tense is compatible with a correct model, but present tense would be incorrect. No inflation has occurred even if the price goes from $100 to $100,000 for the exact same item. Again, as I've said several times elsewhere in this thread, when we are speaking jokingly or informally it is perfectly okay to say "asset price inflation" and everyone will informally understand what you mean. But I've been trying to explain how the government calculates inflation.
If the price goes from $100 to $100,000 for the exact same capital good that you own, you've become wealthier in nominal terms. However, you will need to pass along this price increase to those further down the line, either another company or a final consumer of some product of which your product might be a part. Once the final consumer sees the price increase, then the government will declare it to be inflation. But the government does not regard it as inflation in the CPI till it reaches the final consumer.
It might be a technical point, but it is worth keeping in mind: even those events that guarantee consumer inflation are not consumer inflation until they reach the final consumer. The distance in time might be weeks or years. Sometimes an event occurs and consumers feel the effect within a day -- gasoline prices are often like this, a terrorist attack in Saudi Arabia can see an uptick in prices within a day or two. Other times some event occurs and it takes years before consumers see the increase in prices; over fishing of the oceans is an event that almost guarantees consumer inflation, but typically takes several years to settle in, as the effect among the fish is multi-generational.
>But the government does not regard it as inflation in the CPI till it reaches the final consumer.
I think this really drills down into the crux of the problem that was posed. If you merely want to survive and not build up investments and capital for your later life and heirs, then consumer inflation gives you a good picture of how prices are raising around you and what your purchasing power looks like.
If you actually care about having some security for the future, land or assets for your business, preserving wealth for general use in any asset class, or something to pass on for your family, or being a PART of the world rather than just a consumer, then the CPI looks like a poor indicator of your changes in purchasing power.
The problem is these numbers get reported in headlines as “inflation”.
People are experiencing greater than 6% inflation in their pocketbooks. So I suppose I’m objecting to something different from what you’re talking about.
That is a valid issue that you raise, but unrelated to the conceptual issue of whether an increase in the nominal price of an asset can be coherently understood to be a form of "inflation." Hopefully everyone on Hacker News is smart enough to know that housing has special features that are different from other asset classes.
An asset cannot experience inflation. The word inflation suggests something that loses values. A home that gains in value is clearly not suffering inflation, rather, that is the opposite of inflation.
If you earn $200k a year, and there is 5% consumer inflation, and a year later you still make $200k, then in a sense you are 5% poorer.
If you've a house worth 200k and its value goes up 5%, then a year later you are 5% wealthier.
We might joking and informally refer to "asset inflation" but please remember, under any formal model, there is no such thing; it would be a contradiction in terms.