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Inflation Not an Issue Now for Fed, but Asset Inflation Is

The low interest rate environment spanning the global markets has been fueled by the accommodating monetary policies of central banks worldwide, creating a concern among many economists. The concern is that rather than central bank policies igniting global growth, asset prices have instead been stoked by the decline in global rates.

Asset price levels including stocks, bonds, homes, art, and collector cars have all been rising steadily since broad accommodations began nearly 10 years ago. Some believe that this may have led to demographical imbalances where those having the ability to borrow at low rates have benefited as their financed asset purchases have grown more than global GDP. The question is as to whether asset prices will continue to grow even as global GDP growth languishes.

It is believed that the Fed could alter this distortion by raising rates thus limiting the cheap financing of assets across all sectors. Inflation has also been below the Fed’s 2% target for some time, with the CPI core index annualizing an increase of 1.7% as of June.

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Some see risk masked by elevated asset prices that could become susceptible to an increase in rates. As the cost of financing assets rises in the form of higher rates, asset prices tend to fall.

Source: Federal Reserve, BLS