Asset Price Inflation

Asset price inflation is the rise in the prices of assets such as homes, stocks, land, and collectibles caused by an expanding money supply rather than by any real increase in what those assets are worth. A house that sold for $200,000 and now sells for $450,000 may have the same square footage, the same roof, and the same neighborhood. What changed is the currency used to measure its price.

The Austrian school defines inflation as the expansion of the money supply itself, with rising prices as one of the effects. New money does not reach everyone equally or at the same time. It usually enters through banks, credit markets, and financial institutions first, and that is where it tends to settle: in assets. This is why a country can report modest consumer price inflation while home prices and stock indexes rise sharply. The official index measures groceries and gas, while the newly created money has already moved into real estate and portfolios. Economists call this uneven spread the Cantillon effect. People nearest the source of new money benefit first, and everyone else pays the higher prices afterward.

Asset price inflation also creates a misleading sense of wealth. Homeowners and investors feel richer as their numbers go up, even though their purchasing power may be the same or lower. First-time buyers and anyone trying to buy into an asset class feel the opposite. They need far more dollars to purchase the same thing, and they often have to borrow those dollars at higher rates.

Why It Matters

When you understand asset price inflation, you can stop asking why houses are so expensive and start asking what happened to the dollar. As Rob Brayton put it in Episode 047, home prices are high not because homes gained value, but because the money lost value. Keeping a store of capital you control, outside a system that keeps diluting the currency, is one of the few ways to stay ahead of that loss.

Hear asset price inflation discussed in Between The Lies Episode 047. Get the free toolkit at PerfectSpiralCapital.com/podcast.