0
0
In recent decades, the world has faced a unique economic challenge: rising asset price inflation that has far outpaced inflation in consumer goods and services. This trend is having a huge impact on housing affordability and overall well-being.
While traditional measures of inflation such as CPI (consumer price index) and RPI (retail price index) focus on changes in the cost of goods and services, they ignore asset price inflation such as property and equities, leading to an underestimation of the real rate of inflation. Recognizing this challenge, many are exploring alternative investment opportunities, such as UK low deposit casinos.
The Difference Between Asset and Goods Inflation
The main difference between asset inflation and consumer goods inflation is the rate of price increases. Asset prices have risen much faster than prices of goods and services and wages over the past 20-30 years, making housing less affordable for the general population. This difference emphasises the need to rethink approaches to measuring and controlling inflation.
Impact of inequality on asset inflation
One of the main reasons contributing to faster asset price inflation than consumer goods and services inflation is the increase in income inequality in society. This inequality affects the economy in the following ways:
- Redistribution of income: As the gap between the rich and the poor widens, most of the income is concentrated in the hands of the rich. Unlike the middle and lower classes who spend most of their income on consumption of goods and services, the rich invest a large portion of their money in asset purchases.
- Demand for assets: Rising income among the rich leads to an increase in demand for assets, including property and equities. This, in turn, leads to an increase in their value, making assets less affordable for low- and middle-income people.
- Impact on housing affordability: As a large proportion of the wealthy invest in property, house prices rise faster than the incomes of the majority of the population, making housing unaffordable for the general public.
- Social inequality: The increase in asset values, while income growth is limited, increases social inequality. Asset owners become richer while the financial situation of the rest of the population worsens or stagnates.
The Role of Central Banks
Central banks, in an attempt to control inflation at 2 per cent, focus exclusively on consumer price and wage inflation, ignoring asset price inflation. Far from contributing to the housing affordability problem, this approach exacerbates it by limiting wage growth and ignoring asset price growth.
An Unsolvable Problem
The current system has resulted in housing becoming less and less affordable and the gap between asset values and wages widening. The solution to this problem requires either an increase in wages, which is limited by central bank policy, or a reduction in house prices, which could lead to an economic crisis and mass bankruptcy of homeowners.
A Way Out Of The Situation
To reduce the negative impact of inequality on the economy and eliminate the problem of asset inflation is necessary:
- Revise tax policy: Imposing higher taxes on the rich and reducing the tax burden on the middle and lower classes can contribute to a more equitable distribution of income.
- Stimulating productive investment: Making investment in productive assets more attractive can reduce demand for real estate and other financial assets, thereby stabilising their value.
- Developing affordable housing programmes: Public and private investment in affordable housing can help address the shortage of supply in the market and make housing more affordable for the general population.
- Strengthening social support: Increasing social support and introducing programmes to help low and middle-income groups will help reduce the impact of inequality on people’s lives and improve their financial situation.
Conclusion
Asset inflation is an important factor to consider when analysing the economic situation. It has a significant impact on housing affordability and the general welfare of the population. Addressing this problem requires changing approaches to measuring inflation and revising economic policy towards equitable income distribution and incentivising wage growth.
FAQ
Does asset inflation affect rental housing costs?
Yes, asset inflation can lead to higher rental costs as property owners seek to offset the increase in the value of their assets.
Can asset inflation trigger an economic crisis?
Yes, sharp fluctuations in asset prices can lead to economic crises, such as property or stock market crises.
Is there a link between asset inflation and the level of interest rates?
Yes, low interest rates can contribute to asset inflation by increasing the availability of credit for asset purchases.
How does asset inflation affect retirement savings?
Asset inflation can both positively and negatively affect retirement savings depending on the structure of the investment portfolio.
