Americans often say inflation feels higher than what official statistics report. For most of economic history, inflation had a clear meaning: an increase in the supply of money. Rising prices were simply the consequence of inflation, not the definition.
“Inflation is an increase in the quantity of money and credit,” Henry Hazlitt explained in Economics in One Lesson. “Its chief consequence is soaring prices.”
In other words, as the economist Ludwig von Mises observed, inflation is a policy.
If you tune into CNBC or Fox Business today, however, you will hear inflation specifically used to discuss the increase in prices as measured by the consumer price index (CPI) or personal consumption expenditures (PCE). The difference may seem technical, but this definitional shift has changed the entire way we view monetary policy, economic inequality, and financial stability.
Over the course of the twentieth century, the monetary definition favored by economists such as Mises and Hazlitt was gradually replaced by a price-based definition. In a 2012 paper, monetary economist Claudio Borio argued that the economics profession had forgotten lessons of the past and had neglected the financial drivers of business cycles, particularly the roles of credit creation and asset prices.
Measurement of the CPI began on a small scale around World War I. It was expanded and revised around World War II, with further methodological changes occurring in the 1970s and again in the 1990s. These revisions introduced “substitution logic,” allowing the index to reflect consumers switching to lower-cost goods as prices rise. The result is an index that may not fully capture the cost of maintaining a consistent standard of living over time.
Because the definition of inflation has shifted from increases in the money supply to changes in prices, policy prescriptions that allow for large increases in the supply of money and credit may not meet immediate public backlash if consumer prices remain relatively stable. This can be politically convenient, as policymakers can increase the supply of money to fund politically popular initiatives while inflation appears contained in official statistics.
The Cantillon Effect, named after the Irish-French economist Richard Cantillon, explains that new money does not flow into the economy evenly. As money and credit are added to the system (from sources such as central banks and bank lending) the first people to receive new money benefit the most. Later recipients face higher prices, and the new money doesn’t go as far.
The first place the newly created money shows up is, perhaps unsurprisingly, in financial assets: stocks, bonds, real estate, and speculative investments. As the Adam Smith Institute explains, because the Federal Reserve distributes newly created money through banks as intermediaries (an effect sometimes known as “financing the financiers”) asset prices tend to react long before consumer prices.
As an example of this effect in practice, the S&P 500 averaged roughly 948 in 2009. At the time of writing in March 2026, it sits around 6700, an increase of roughly sevenfold. Meanwhile, the Minneapolis Fed reported the CPI at 214.5 in 2009 and 321.9 in 2025, a roughly 50 percent increase. In other words, asset prices increased considerably faster than consumer prices. Housing showed the same phenomenon. The S&P CoreLogic Case–Shiller Home Price Index rose from roughly 134 (at the post-financial-crisis low in 2012) to about 327 by the end of 2025, an increase of roughly 140 percent. Most of this growth in asset prices can be traced directly to loose monetary policy pushing new money into the economy from the top (central banks).
By changing the definition of inflation to consumer price increases, we draw attention away from asset price inflation. This leads many Americans to assume that a 40-percent increase in home prices is normal, or simply a market outcome. A stock market detached from earnings is seen as investor optimism, not a distortion caused by monetary expansion.
Meanwhile, these inflationary policies price young families out of homes and pressure retirees into riskier assets just to preserve purchasing power.
Consumer price indices were never designed to capture increases in asset prices. Their focus on rising prices in consumer goods diverts our attention from assets such as real estate and equities, where vast amounts of capital are stored and invested, and which play a major role in wealth inequality.
When people say they feel that “inflation is higher than what’s being reported,” they are not delusional. Their intuition is picking up on measurable phenomena that are simply not captured in government-reported statistics.
If the goal of inflation measurement is to capture the social impact of money creation, asset prices must be included. A framework that ignores asset inflation systematically understates the cost of monetary expansion and obscures its distributional effects.
Redefining inflation from a monetary phenomenon to a consumer price statistic has allowed unprecedented money creation without corresponding accountability. The result is an economy marked by asset bubbles, growing inequality, and public distrust in official economic narratives.
Inflation didn’t disappear. Our definitions changed in ways that make it much harder to see.
