Asset price inflation

Source: Wikipedia, the free encyclopedia.
U.S. housing bubble
is one example of asset price inflation.

Asset price inflation is the economic phenomenon whereby the price of assets rise and become inflated. A common reason for higher asset prices is low interest rates.[1] When interest rates are low, investors and savers cannot make easy returns using low-risk methods such as government bonds or savings accounts. To still get a return on their money, investors instead have to buy up other assets such as stocks and real estate, thereby bidding up the price and creating asset price inflation.

When people talk about

capital assets
. Inflation of such assets should not be confused with inflation of consumer goods and services, as prices in the two categories are not directly correlated. The prices of some goods and services such as housing, energy, and food do track closely with some financial assets.

The primary beneficiaries of rising asset prices are usually those who earn the highest wages or salaries, since the tendency to save and invest is higher.[2]

Examples of typical assets are

capital goods. They can also include alternative investment assets such as fine art, luxury watches, cryptocurrency
, and venture capital.

Price inflation vis-à-vis asset inflation

As

Consumer Price Index.[3]

There is no observable cause and effect relationship between asset price inflation and consumer price inflation. Some studies have shown that housing and real estate prices could be leading indicators of consumer price inflation.[4][5]

Possible causes

Some

political economists[who?] believe that assets inflation has been, either by default or by design, the outcome of purposive policies pursued by central banks and political decision-makers to combat and reduce the much more visible price inflation. [citation needed] This could be for a variety of reasons, some overt, but others more concealed or even disreputable.[citation needed
] Some think that it is the consequence of a natural reaction of investors to the danger of shrinking value of practically all important currencies, which, as in 2012 e.g., seems to them highly probable due to the tremendous worldwide growth of the mass of money. Their preference for real goods pushes their price up without any purposive policies from decision-makers.

Possible results

Asset price inflation has often been followed by an asset price crash. This can happen in a sudden and sometimes unexpected fall in the price of a particular

2007 subprime mortgage financial crisis. However, if the money supply has the potential to induce heavy general inflation (all major currencies in 2011/2012) none of these crashes may happen[citation needed
].

See also

References

  1. ^ Robert, Shiller. "LOW INTEREST RATES AND HIGH ASSET PRICES: AN INTERPRETATION IN TERMS OF CHANGING POPULAR MODELS" (PDF). Cowles Foundation for Research in Economics, Yale University.
  2. doi:10.1177/0308518X19873673.Open access icon
  3. ISSN 0013-0613
    . Retrieved 2021-08-29.
  4. ^ Batavia, Bala; Nandakumar, Parameswaran; Wague, Cheick (January 2007). "Asset prices and inflation: Is there a predictive link?" (PDF). Institutional Repository of Indian Institute of Management Kozhikode: 12 – via DSpace.
  5. doi:10.1111/1467-9957.68.s1.7
    .(subscription required)
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