We saw last month how many of the commonly presumed macroeconomic causes of inflation have been inoperative at best since financial deregulation began in the early 1980s ("Inflation's macro myths," April 2010). As macro data are released infrequently and are by definition backward-looking, can we get a better handle on the poorly understood problems of what inflation is and how we should address it from high-frequency, market-derived financial data?

The question becomes more intriguing if one of the hypotheses offered last month — that a complete picture of inflation must incorporate asset valuations as well as price indices — is correct. The idea here is that excess money, which is used to push prices of goods and services higher, now pushes asset valuations higher. In addition, investors’ collective risk-acceptance increases. The global carry trades, fueled by cheap yen, dollars, and Swiss francs, are the mechanism behind this phenomenon.