Let’s Talk Some More About Assflation

One of the persistent themes since 2008 is the theory that there has been excessive “asset price inflation”. I’ve talked about this quite a bit before, but it needs some repeating. And no, “assflation” does not refer to the 19 lbs we’ve all put on during COVID. It refers to the term “asset inflation”. This is the idea that the “inflation” that was supposed to show up in consumer prices has been showing up in asset prices like stocks and housing. There’s a bit of truth to this, but let’s discuss this in more detail so we can keep things in the right perspective.

Stock Exchange, Profits, Boom

Capital Goods vs Consumption Goods

It’s important to make a clear distinction between capital goods and consumption goods in the context of the term “inflation”.

A consumption good is something that you literally consume. Its value erodes (or disappears) because you consume it over time. For instance, when you buy a cheeseburger for $10 you temporarily have an asset that is worth $10. But you immediately consume that cheeseburger and your $10 asset disappears.¹ If you have to buy another cheeseburger tomorrow for $20 because of consumer price inflation then you are worse off than you were yesterday because you now have less to spend on other goods and services. The seller of cheeseburgers might be better off if they have pricing power, but the more important fact is that you are definitively worse off if the only food you consume is cheeseburgers. Since everyone has to eat everyone is worse off except for the seller of cheeseburgers.

A capital good is something that results from investment, but does not necessarily get consumed (or holds its value over time). For instance, if you built a house for $100,000 you would buy many material capital goods. Those physical capital goods might depreciate over time, but they might also appreciate over time. The kicker is that you don’t necessarily consume them in the same way that you consume a cheeseburger.

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Disclaimer: The content in this article is provided as general information only and should not be taken as investment advice. Article content shall not be construed as a recommendation ...

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