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Is there a way to differentiate between the appreciation of an asset and the devaluation of the currency it is denominated in (inflation)? I know I could look at conventional inflation measures (like CPI) and compare against the performance of the asset in question, but one could argue certain baskets of 'things' haven't been impacted by inflation at the same rate because of lower/higher money velocity. I could compare asset price against increase in money supply, but this seems rudimentary and would imply inflation is 1:1 correlated with increased money supply and that doesn't sound right. Is there a sure-fire way to distinguish between the two for a given asset?

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The simple answer is "no".

Concepts like inflation, devaluation etc are debated heavily among "economists". There's not even close to an agreed definition.

Nobody has the slightest clue how fiat money supply affects inflation-like concepts, and nobody even vaguely agrees on basics like what money supply is.

Your question is essentially saying "Explain the greatest and most heavily debated monetary-economic-political issue of the last 500 years" - !

(Just one point, note that inflation does not exist, it's just talking point. It's not quantative. If you're sports fan, some facts are "The bucs won the most recent superbowl" and "the current record marathon is 2:01:39". In contrast you know how the newspapers will have articles about "MVP"? ie some guys write down their idea on who is the "MVP". Maybe they have a vote amongst sports writers. Inflation is like that - "talk". Various newspapers, boards, universities etc have a few guys sit down and decide on what "inflation" was in country X last year. (You can pick sundry completely different methodologies, and choose a newspaper you like.) So what? If a few guys at The Economist say "Inflation in France last year was: 3.343%" who cares?)

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    There's definitely plenty to argue about regarding inflation, but I think you overstate the level of uncertainty around it. Arguing about what is in the market basket is a far cry from saying that the whole concept doesn't make sense. And saying "inflation doesn't exist" just isn't true. It is absolutely real, even if difficult to measure precisely and open to debate regarding the mechanisms.
    – Michael
    Commented Apr 24, 2021 at 20:19
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Inflation is a general up trend in price when value remains unchanged. Hence "the same thing" suddenly costs more.

Appreciation is a bona fide increase in value. This tends to also increase the price that the market will pay.

Thus put, the difference is clear: value_final - value_initial = appreciation and appreciation + inflation = price_final - price_initial The problem of course is that it is very hard to accurately determine value. There are ways - but ultimately, almost all measures of value are more or less contaminated by inflation.

You can go the other way and simply measure the inflation, and then work back to get appreciation. This is somewhat circular in that inflation is defined in relation to value. This is where things like CPI come in - the premise is that the benchmark is either inherently unlikely to appreciate much, or the appreciation happens to be very predictable. Of course, it is debatable whether you can assert that there is any asset which does not appreciate or depreciate over a given time. But if you trust the government's CPI (or any other's source's), then you can use it to infer appreciation, and the appreciation will be accurate to the extent that the CPI is accurate.

So let's say:

  • CPI was 2% over last 10 years
  • You bought a house 10 years ago for 200k
  • The house is now 300k

You have a price difference of 100k or 50%. The inflation alone would have resulted in 244k, so we can consider the 56k to be appreciation.

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  • nicely done! Upvote
    – RiverNet
    Commented Apr 23, 2021 at 23:02
  • Shouldn't your example use the housing CPI instead of the general CPI?
    – Flux
    Commented Apr 24, 2021 at 1:17
  • @Flux: No, at least IMHO. Housing CPI is going to be affected by factors other than inflation, e.g. the area you live in having become a hot housing market.
    – jamesqf
    Commented Apr 24, 2021 at 3:08
  • Is CPI an accurate measure of inflation? You said “if you trust the government’s CPI”...
    – Runeaway3
    Commented Apr 24, 2021 at 4:45
  • I am sorry, I just can't agree with this answer. The first sentence would be something like me stating blankly "Dark matter is sterile neutrinos" (of course, nobody has a clue what dark matter is, and it's actively debated).
    – Fattie
    Commented Apr 24, 2021 at 15:01
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I know I could look at conventional inflation measures (like CPI) and compare against the performance of the asset in question, but one could argue certain baskets of 'things' haven't been impacted by inflation at the same rate because of lower/higher money velocity

Your basic approach is correct. You take measured inflation and subtract it from your gains. The problem is measuring inflation. The problem you have spotted is that measuring some basked of things is not necessarily measuring "true inflation", but this does not have anything to do with money velocity. The problem is based on a much simpler issue: inflation for different things is different.

Let's say the price for gas is decreasing but the price for TVs is increasing. How do you weigh this? You can build some basket, average things out and postulate this as the official inflation rate. But this is just an approximation and it will inevitable be different from the inflation everybody feels. Even worse, it may miss entire categories, e.g. in some countries only rent (=pretty sticky prices) is counted towards inflation but not self-owned homes (which are a lot more volatile in price). How do you properly account for categories where prices are falling fast like consumer electronics? After all, something comparable to the flagship phone of today will be available for like 200$ in the pretty near future. Additionally there is the problem of actually measuring prices. How do you treat items that are currently on sale? What is the price of a flight with airlines changing prices all the time? (Bonus question: how do you measure the price of a service if that is unavailable during lockdown times?) All of these issues make CPI a not so suited measure for inflation.

A probably better way to judge inflation over long time periods is to compare your asset to incomes. After all, no matter what we count or not, if things get more expensive overall, people will demand higher wages. Over the long run, this should roughly be on par with the actual inflation

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  • I understand your points here, but I am having a bit of issue with your statement saying 'it has nothing to do with money velocity'. While I agree that the overarching issue is that different things inflate differently, could you not argue that varying money velocity is at least partly a contributor to this phenomenon?
    – Runeaway3
    Commented Apr 25, 2021 at 17:19
  • Well...money velocity is a concept of a world of cash but is pretty blurry as a concept in a world of electronic payment and fractional banking. And even if we ignore this complication and assume an all-cash economy does higher velocity mean that people can afford higher prices? No, because the money is just circulating faster. So velocity is at best a symptom of inflation (because people do not want to hold fastly depreciating cash) but not a cause.
    – Manziel
    Commented Apr 25, 2021 at 20:29

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