Asset price inflation is an economic phenomenon denoting a rise in price of assets, as opposed to ordinary goods and services. Typical assets are financial instruments such as bonds, shares, and their 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.
Price inflation and assets inflation
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 decade consistently risen by or at least near a two digit percentage, far above that of the Consumer Price Index.
Some political economists 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. This could be for a variety of reasons, some overt, but others more concealed or even disreputable. 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.
Asset price inflation has often been followed by an asset price crash, a sudden and usually 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. It was also a contributory factor in 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.