CPI vs. Asset Price Inflation

Between 2009 and 2021, the S&P 500 rose roughly 600%. U.S. CPI rose about 30%. That is a 20:1 divergence in cumulative price changes, one of the most striking in modern economic history.

The Numbers

| Period | CPI (cumulative) | S&P 500 | M2 Money Supply | |--------|------------------|---------|-----------------| | 2009-2019 | +19% | +350% | +85% | | 2020-2021 | +11% | +48% | +40% |

The scale of the divergence is important. Standard monetary theory predicts that sustained money growth should eventually pass through to consumer prices. For over a decade, it did not, at least not in CPI terms.

Where Did the Money Flow?

After the 2008 financial crisis, the Federal Reserve expanded its balance sheet from roughly $900 billion to over $4.5 trillion through three rounds of quantitative easing (QE). The common expectation was consumer price inflation. It did not materialize in CPI terms until much later.

Instead, the new liquidity primarily affected financial asset prices through several channels:

1. Bank reserves vs. broad money: QE credited commercial banks with reserves at the Fed, but lending to the real economy was constrained by weak loan demand, tighter underwriting standards, and household deleveraging (Kuttner, 2018).
2. Portfolio rebalancing: Investors displaced from low-yielding Treasuries moved into equities, corporate credit, and real estate, compressing risk premia across asset classes (Krishnamurthy and Vissing-Jorgensen, 2011).
3. Wealth effects with limited pass-through: Asset prices rose, enriching asset holders, but the transmission to consumption spending and wages was attenuated.

This is a well-documented mechanism in the academic literature, not an anomaly. The key insight is that the channel of injection matters as much as the quantity of money created.

The Post-COVID Inflection

In 2020-2021, something structurally different occurred. Fiscal stimulus (direct payments to households, enhanced unemployment insurance, PPP loans) combined with supply-chain disruptions pushed CPI sharply higher. For the first time in decades, both consumer and asset prices inflated simultaneously.

The critical difference: fiscal transfers deposited money directly into household bank accounts, bypassing the financial-system intermediation channel. Goodhart and Pradhan (2020) anticipated this shift, arguing that the combination of demographic pressures and fiscal expansion would break the low-inflation equilibrium.

Then in 2022, the Fed raised rates at the fastest pace in four decades. Asset prices corrected (S&P 500 fell roughly 25%), but CPI proved sticky, particularly in shelter and services categories. The divergence temporarily reversed.

Implications

• CPI is a well-constructed index for its intended purpose, but it captures one specific slice of the price landscape. It is not designed to measure asset-price inflation.
• The relevant "inflation rate" for any individual depends heavily on their asset holdings and consumption basket.
• Understanding where new money enters the economy (financial system vs. household accounts) is as important as understanding how much is created (Cantillon, 1755; Cochrane, 2023).

Explore this divergence visually on the U.S. Dashboard: toggle between CPI, M2, and CAPE charts. They all zoom together.

References

• Cantillon, R. (1755). Essai sur la Nature du Commerce en General.
• Cochrane, J. H. (2023). The Fiscal Theory of the Price Level. Princeton University Press.
• Goodhart, C. A. E. & Pradhan, M. (2020). The Great Demographic Reversal. Palgrave Macmillan.
• Krishnamurthy, A. & Vissing-Jorgensen, A. (2011). "The Effects of Quantitative Easing on Interest Rates." Brookings Papers on Economic Activity, Fall 2011, 215-287.
• Kuttner, K. N. (2018). "Outside the Box: Unconventional Monetary Policy in the Great Recession and Beyond." Journal of Economic Perspectives, 32(4), 121-146.

Next: How Money Supply Works