Hyman Minsky would have had a field day with last week's US inflation numbers. One of the key points in the late, great economist's Financial Instability Hypothesis was that there are two kinds of prices -- prices for goods and services, and asset prices. Inflation in the two areas should, as a result, differ. And indeed they have, quite markedly. The latest Consumer Price Index figures show that almost all core inflation, which was weaker than expected, was in rent or the owner's equivalent of rent (up 0.3 per cent). Core goods inflation, meanwhile, was down 0.2 per cent. Very simply, this means that the housing market is once again completely out of sync with the rest of the economy.

A decade on from the subprime bubble, housing, which is not only shelter but also the biggest financial asset for most Americans, is the only major component of the CPI with a national inflation rate that is consistently above the overall number. Why is this? Because, just as Minsky would have predicted, loose monetary policy over the past several years buoyed assets, but didn't create meaningful new supply or, consequently, enough demand in construction and other home-related areas. The point is illustrated in an academic paper, "What the Federal Reserve got totally wrong about inflation and interest rate policy" from the Mario Einaudi Center for International Studies at Cornell University. As its author Daniel Alpert says: "What we have now is a form of inflation that's never been seen before -- it's all concentrated in housing."

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