Inflation and deflation are, at the core, changes in supply and demand for money, leading to changes in the value of money.  These changes in value are a bit occult, however, because we habitually use the money itself as our unit of value.  So instead of directly observing changes in the value of the money, we notice it in changes in the price of other things in that money.  If for example the value of the money goes down, it takes more of it to buy the same stuff.  Prices rise.  

These price increases are far from uniform.  As the value of money declines, the prices of one group of things may rise much more than others.  This can go on for years before the prices of the others begin to catch up.  

Take for example the broad categories of asset prices and consumer prices.  Assets are usually the first responders, in part because a big component of those prices is securities such as stocks, which reprice in real time, tick by tick.  Consumer prices tend to be late responders, in part because a big component of those prices is wages, which tend to reprice on an annual or multi-annual basis.  

These long and variable lags create the illusion that there are different kinds of inflation … analysts often refer to “asset price inflation” or “consumer price inflation”.  But in the long run, they converge.  They must.  

Why?  From the point of view of the investor, investment assets are claim tickets on production.  Their real value lies in what real goods and services they can buy with them.  If asset prices rise 20% and the totality of goods and services available has risen only 5%, then the real value of that body of assets can have risen only 5%.  The rest is inflation.  One of two things must eventually happen:  The price of the assets must decline or the price of the goods and services rise.  Or some combination of both.  

This of acute interest today.  Over the past dozen or so years, asset prices have risen three to five fold.  Goods and services have risen far less.  The effect is not unlike a game of musical chairs, where one or two chairs has been added to the room while ten or twelve more people have quietly joined the game.  When the music stops and the players try to claim their seats, the deficit in seats becomes noticed.  The seat claim tickets are not worth what the players may have imagined.  

We can’t know in advance how this convergence will happen … whether it will come about through a huge increase in consumer prices or a huge decrease in asset prices.  Historically these reckonings have been some messy combination of both.  At present we’re seeing consumer prices begin to play catch-up in a big way, but this is likely to provoke a policy response.  Such a policy response didn’t occur when the inflation was confined mostly to asset prices, because asset price increases are popular and fun, and central bankers pretend they live outside the inflation arena.  People believe they’re getting rich.  But asset prices and consumer prices have to be reckoned.  When consumer prices begin to outpace asset prices, the music stops.