Asset price inflation: Difference between revisions
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{{Short description|Rise in the value of financial and capital assets}} |
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{{Multiple issues| |
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[[File:Large Salinas house.jpg|thumb|The [[United States housing bubble|U.S. housing bubble]] is one example of asset price inflation.]] |
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{{cleanup rewrite|date=November 2010}} |
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'''Asset price inflation''' is the [[economy|economic]] phenomenon whereby the [[price]] of [[asset]]s rise and become inflated. A common reason for higher asset prices is low interest rates.<ref>{{Cite journal|last=Robert|first=Shiller|title=LOW INTEREST RATES AND HIGH ASSET PRICES: AN INTERPRETATION IN TERMS OF CHANGING POPULAR MODELS |url=https://cowles.yale.edu/sites/default/files/files/pub/d16/d1632.pdf|journal=Cowles Foundation for Research in Economics, Yale University}}</ref> 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. |
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{{expert subject|date=April 2009}} |
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{{refimprove|date=October 2007}} |
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}} |
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When people talk about [[inflation]], they usually refer to ordinary [[goods and services]], which is tracked by the [[Consumer price index|Consumer Price Index]] (CPI). This index excludes most [[financial assets]] and [[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. |
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'''Asset price inflation''' is an |
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[[economy|economic]] phenomenon denoting a rise in [[price]] of [[asset]]s, as opposed to ordinary [[goods and services]]. |
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{{Citation needed|date=April 2009}} Typical assets are [[financial instrument]]s such as [[Bond (finance)|bonds]], [[Share (finance)|shares]], and their [[Derivative (finance)|derivatives]], as well as [[real estate]] and other [[capital goods]]. Although the values of such assets are often casually said to "inflate," this should not be confused with [[inflation]] as a defined term. A more accurate description for an increase in the value of a capital asset is [http://financial-dictionary.thefreedictionary.com/Asset+Appreciation appreciation]. |
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{{Citation needed|date=April 2009}} |
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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.<ref>{{cite journal |last1=Adkins |first1=Lisa |last2=Cooper |first2=Melinda |last3=Konings |first3=Martijn |title=Class in the 21st century: Asset inflation and the new logic of inequality |journal=[[Environment and Planning|Environment and Planning A: Economy and Space]] |date=May 2021 |volume=53 |issue=3 |pages=548–572 |doi=10.1177/0308518X19873673|doi-access=free }}{{open access}}</ref> |
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| ⚫ | As [[inflation]] is generally understood and perceived as the rise in price of 'ordinary' goods and services, and official and [[central bank]] policies in most of today’s world have been expressly directed at minimizing 'price inflation', assets inflation has not been the object of much attention or concern. An example of this is the housing market, which concerns almost every individual household, where house prices have over the past |
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Examples of typical assets are [[Share (finance)|shares]] and [[Bond (finance)|bonds]] (and their related contracts), as well as [[real estate]], [[gold]] and other [[capital goods]]. They can also include alternative investment assets such as fine art, luxury watches, [[cryptocurrency]], and venture capital. |
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| ⚫ | As [[inflation]] is generally understood and perceived as the rise in price of 'ordinary' goods and services, and official and [[central bank]] policies in most of today’s world have been expressly directed at minimizing 'price inflation', assets inflation has not been the object of much attention or concern. An example of this is the housing market, which concerns almost every individual household, where house prices have over the past 25 years consistently risen by or at least near a two digit percentage, far above that of the [[Consumer Price Index]].<ref>{{Cite news|date=2021-07-29|title=Why don't rising house prices count towards inflation?|newspaper=The Economist|url=https://www.economist.com/the-economist-explains/2021/07/29/why-dont-rising-house-prices-count-towards-inflation|access-date=2021-08-29|issn=0013-0613}}</ref> |
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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 [[Economic indicator#Classification by timing|leading indicators]] of consumer price inflation.<ref>{{Cite journal |last=Batavia |first=Bala |last2=Nandakumar |first2=Parameswaran |last3=Wague |first3=Cheick |date=January 2007 |title=Asset prices and inflation: Is there a predictive link? |url=http://dspace.iimk.ac.in/xmlui/bitstream/handle/2259/340/bala%20%282%29.pdf?sequence=1&isAllowed=y |journal=Institutional Repository of [[Indian Institute of Management Kozhikode]] |page=12 |via=[[DSpace]]}}</ref><ref>{{cite journal |last1=Goodhart |first1=Charles |last2=Hofmann |first2=Boris |title=Do Asset Prices Help to Predict Consumer Price Inflation? |journal=[[The Manchester School (journal)]] |date=January 2000 |volume=68 |issue=s1 |pages=122–140 |doi=10.1111/1467-9957.68.s1.7}}{{subscription required}}</ref> |
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==Possible causes== |
==Possible causes== |
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Some [[political economist]]s{{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|date=April 2009}} This could be for a variety of reasons, some overt, but others more concealed or even disreputable.{{Citation needed|date=April 2009}} 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. |
Some [[political economist]]s{{who|date=January 2020}} 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|date=April 2009}} This could be for a variety of reasons, some overt, but others more concealed or even disreputable.{{Citation needed|date=April 2009}} 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. |
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==Possible results== |
==Possible results== |
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Asset price inflation has often been followed by an asset price crash |
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 [[asset class]]. Examples of asset price crashes include [[Tulip mania|Dutch tulips]] in the 17th century, [[Japanese asset price bubble|Japanese metropolitan real estate and stocks]] in the early 1990s, and internet stocks in 2001. A more recent example is that of the [[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|date=May 2013}}. |
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== See also == |
== See also == |
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* [[ |
* [[Economic bubble]] |
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* [[Inflationism]] |
* [[Inflationism]] |
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* [[Inflation hedge]] |
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==References== |
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{{reflist}} |
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==External links== |
==External links== |
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[[Category:Asset]] |
[[Category:Asset]] |
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[[Category:Pricing]] |
[[Category:Pricing]] |
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Latest revision as of 04:47, 2 December 2024
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 inflation, they usually refer to ordinary goods and services, which is tracked by the Consumer Price Index (CPI). This index excludes most financial assets and 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 shares and bonds (and their related contracts), as well as real estate, gold and other 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
[edit]As inflation is generally understood and perceived as the rise in price of 'ordinary' goods and services, and official and central bank policies in most of today’s world have been expressly directed at minimizing 'price inflation', assets inflation has not been the object of much attention or concern. An example of this is the housing market, which concerns almost every individual household, where house prices have over the past 25 years consistently risen by or at least near a two digit percentage, far above that of the 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
[edit]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
[edit]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 asset class. Examples of asset price crashes include Dutch tulips in the 17th century, Japanese metropolitan real estate and stocks in the early 1990s, and internet stocks in 2001. A more recent example is that of the 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
[edit]References
[edit]- ^ 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.
- ^ Adkins, Lisa; Cooper, Melinda; Konings, Martijn (May 2021). "Class in the 21st century: Asset inflation and the new logic of inequality". Environment and Planning A: Economy and Space. 53 (3): 548–572. doi:10.1177/0308518X19873673.
- ^ "Why don't rising house prices count towards inflation?". The Economist. 2021-07-29. ISSN 0013-0613. Retrieved 2021-08-29.
- ^ 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.
- ^ Goodhart, Charles; Hofmann, Boris (January 2000). "Do Asset Prices Help to Predict Consumer Price Inflation?". The Manchester School (journal). 68 (s1): 122–140. doi:10.1111/1467-9957.68.s1.7.(subscription required)
External links
[edit]- Newsletter. Robert Blumen. Mises Institute