No inflation? What if we use an alternative yardstick?

In a recent blog post, I noted that Paul Krugman continues to maintain that there is no inflation. Says Mr Krugman:

Remember how running the printing presses was going to cause runaway inflation? Since the recession began, the Fed has more than tripled the size of its balance sheet, but inflation has averaged less than 2 percent.

Well, yes, if you use the standard definition of inflation, which measures consumer prices. But, what if you use a different measure of inflation?

Wikipedia defines inflation as follows:

Inflation is a rise in the general level of prices of goods and services in an economy over a period of time. When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation reflects a reduction in the purchasing power per unit of money – a loss of real value in the medium of exchange and unit of account within the economy.

What happens if we replace the phrase "goods and services" with the phrase "stocks and bonds?" The definition now reads:

Inflation is a rise in the general level of prices of stocks and bonds in an economy over a period of time. When the general price level rises, each unit of currency buys fewer stocks and bonds. Consequently, inflation reflects a reduction in the purchasing power per unit of money – a loss of real value in the medium of exchange and unit of account within the economy.

Sounds an awful lot like exactly what is happening in the economy today. Stock and bond prices are at historic highs. If you are a young investor, your 401(K) dollars are buying fewer and fewer shares/securities. So, given this alternative definition, inflation is soaring.

So, when Mr Krugman says there is no inflation, what he really means is that consumer prices, and also wages, remain low, while the prices of various investment asset classes are rocketing to the moon. Try as the Fed may, they are unable to stimulate to any meaningful degree economic activity that has an impact on the man on the street. But the members of the 1% are seeing the prices of their assets "inflate" nicely. Unfortunately, these skyrocketing asset prices are pricing young and mom and pop investors out of the market. Even worse, when Mr Bernanke withdraws the "Bernanke put," this bubble will deflate with catastrophic effects for all investors. Perhaps the institutional investors will be able to escape, but retail investors will be left holding the bag.