Grant's Almost Daily Interest Rate Observer:

Is the inflationary outcome long sought by policy makers finally upon us? 

Records are made to be broken. On June 7, a 1963 Ferrari 250 GTO was reportedly sold in a private transaction for a cool $70 million, shattering the previous $52 million record price established 2013, to say nothing of Wikipedia-documented $10.6 million sale prices in 2004, and $2.2 million in 1997. With only a few dozen models of the vintage race car known to aficionados as the “Holy Grail” in existence, the limited supply likely figured prominently in a sale price equivalent to the cost of around 5,600 2016-model Toyota Camry’s, according to local asking prices on TrueCar.

That $70 million sum may not remain the record holder for long: Sotheby’s is set to auction a 1962 250 GTO in Monterey, California on Aug. 24-25, affording collectors another opportunity to outbid one another. Ferrari historian and expert Marcel Massini recently forecast that the GTO will break the $100 million barrier in the next two to three years.

Following the prior benchmark sale in 2013, Grant’s took inventory of the skyward high-end luxury goods market (“Warranty not included”) in the context of the Fed’s then-hyperactive monetary policy, and attempted to determine the motivations of that $52 million car buyer:

Nostalgia? Automotive aesthetics? Suspicion of the currency, and of financial assets denominated in that currency, in this time of unprecedented monetary experimentation? Or maybe he just likes cars.

But, if the last-named hypothesis is correct, why do so many moneyed people like cars now?

Clearly, that was no passing infatuation.  According to consulting firm Knight Frank, luxury autos have produced a whopping 334% return over the 10 years through 2017, by far the best performing subcomponent of the Knight Frank Luxury Investment Index, which is up 126% over that period (wine takes second place with a 192% 10-year return, while furniture is the worst performing component with a 32% loss).

That 126% gain stacks up pretty well against other asset classes. The S&P/Case-Shiller U.S. National Home Price Index has risen by 13% over the 10 years ending in 2017, while gold gained 60% and the Bloomberg Barclays U.S. Total Return Bond Index appreciated by 48%.  Only the S&P 500’s 124% rise, with dividends reinvested, approached the performance of Knight Frank’s luxury gauge, and investors would have been obliged to patiently sit through the 50-plus percent 2008 drawdown on the way to their subsequent gains.

While the upper crust has contended with (or enjoyed) substantial inflation in asset prices, the real McCoy has been far more demure.  Headline CPI rose just 17% in the 10 years ending December 2017.

Is the inflationary outcome long sought by policy makers finally upon us? Year-over-year CPI growth has remained over 2% through the first five months of 2018, reaching 2.8% in May to match its hottest reading since 2011.  More broadly, the New York Fed’s Underlying Inflation Gauge, which includes CPI components as well as a variety of additional macroeconomic and financial data points, jumped to 3.27% in May, its highest reading since 2006.