Investigation of potential link between declining CPI inflation and rising asset prices

Abstract: This paper examines whether there is a link between missing CPI inflation and asset price inflation. It makes use of the quantity theory of money to establish that increased money growth in relationship to real GDP leads to CPI inflation. The model first tests the period leading up to 1990 then the period after 1990. This is done to establish if the quantity theory of money hold and to obtain parameters to make a forecast. The second part consists of making a forecast with the model leading up to 1990 which is then used to make a forecast for the period after 1990. A forecast error is obtained and used as an explanatory variable to model asset prices. The result show that the relationship theorized in the quantity theory of money holds for the period leading up to 1990 but not for the period after 1990. The paper did not find any evidence that missing CPI inflation leads to increasing asset prices. The paper examines Sweden and USA.