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Macroscope
OpinionComment
Tai Hui
Tai Hui

Macroscope | Why asset inflation could be the real danger, not higher consumer prices

  • Three factors have been driving US inflation – energy prices, production bottlenecks and aggressive stimulus programmes
  • But as these risks subside in the next two to three quarters, investors cannot afford to be complacent, given the dangerously high equity valuations and hot property markets

Reading Time:3 minutes
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Part of the New York skyline is seen on July 5. House prices in the US rose 18 per cent in May, compared to a year ago. Photo: Bloomberg
Tai Hui

Businesses, investors and central bankers have all been warning about the risk of inflation since the global economy started to recover in early 2021. The widely cited concern has been that aggressive government spending and interest rates at zero would prompt a sharp spike in inflation, meaning consumers would have to pay more for everything from fuel to food.

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The reality may be somewhat different. It may not be the cost of household items that rockets but, rather, the price of financial assets such as real estate. That scenario would pose a bigger challenge for policymakers and investors in the next two to three years.

It is true that US consumer inflation has been running hot since April. Headline consumer prices rose 4.8 per cent in the second quarter versus a year ago, the highest reading since the third quarter of 2008. There are three factors driving this price surge.

The first is oil and energy-related prices, which were responsible for over 70 per cent of the increase. However, a stabilisation in oil prices, largely helped by Opec’s agreement to gradually restore production in the coming months, should mean that energy prices will play a smaller role in driving inflation going forward.

Second, a number of production bottlenecks are fuelling prices in areas such as used cars and services like air travel, hotel and entertainment. A shortage of semiconductors has hit car production around the world, and this could continue into 2022, effectively driving up pricing in the US used car market.
Meanwhile, in the service sector, businesses are struggling to hire enough people to restore capacity and meet surging demand. This labour shortage could ease as supplementary unemployment benefits expire in September and more workers return.
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