Asset-Price Inflation vs. Economic Growth

By
Sean Ross
Full Bio
Sean Ross is a strategic adviser at 1031x.com, Investopedia contributor, and the founder and manager of Free Lances Ltd.
Learn about our editorial policies
Updated September 13, 2023
Fact checked by
Hans Daniel Jasperson
Hans Daniel Jasperson
Fact checked by Hans Daniel Jasperson
Full Bio
Hans Daniel Jasperson has over a decade of experience in public policy research, with an emphasis on workforce development, education, and economic justice. His research has been shared with members of the U.S. Congress, federal agencies, and policymakers in several states.
Learn about our editorial policies

Economists measure real economic growth using the Gross Domestic Product (GDP). GDP is the monetary value of all finished goods and services made within a country during a specific period and provides an economic growth rate with adjustments for inflation.

Asset-price inflation is the rise in the value of financial and capital assets, such as stocks and real estate, but excluded from inflation statistics like the Consumer Price Index (CPI), Producer Price Index (PPI), and Personal Consumption Deflator. Inflation affects the prices consumers pay their basket of goods included in the GDP and may reduce the value of financial assets.

Key Takeaways

  • Economists measure real economic growth using the Gross Domestic Product (GDP).?
  • Asset-price inflation is the nominal rise in the prices of stocks, bonds, derivatives, and real estate.
  • An economy grows when its productive capacity increases.
  • Rising asset prices are potentially misleading signs of a growing economy.



What Is Asset-Price Inflation?

Asset-price inflation is the nominal rise in the prices of stocks, bonds, derivatives, real estate, and other assets. Rising asset prices are potentially misleading signs of a growing economy. Even if the stock market grows or houses are more valuable, no goods, like those included in the GDP, are produced. Financial assets can be sensitive and volatile and may create an illusion of growth through asset bubbles.

Most standard inflation measures, like the Consumer Price Index (CPI), do not account for rising asset prices.However, while?GDP won't increase from the value of a stock rising from $25 to $30, the stock seller will have additional cash to purchase goods or services, which can grow GDP.

Rising inflation may depress GDP, lead to bank losses, prompt banks to reduce lending, and negatively affect economic activity.

GDP and Real Economic Growth

Most economists track real economic growth by measuring the change in the Gross Domestic Product (GDP) over time. GDP counts all of the output and production generated for sale in the market. Additionally, it includes defense or education services provided by the government.

An economy grows when its productive capacity increases. Real items represent real wealth and rising standards of living. To quantify this, economists track the total value of all final goods and services produced through GDP.

In the second quarter of 2023, real GDP increased at an annual rate of 2.1 percent. In the first quarter, real GDP increased 2.0 percent. The increase in the second quarter primarily reflected increases in consumer spending and business investment.GDP is adjusted to real GDP by changing the money value measure, nominal GDP, into an index for the quantity of total output.

Real GDP: 2022 to 2023
Source: U.S. Bureau of Economic Analysis.

Why Do Higher Interest Rates Lower Asset Prices?

Higher interest rates reduce asset prices by making saving appealing, and higher interest rates reduce the intrinsic value of assets.

How Is the GDP Used to Set Economic Policy?

The White House and Congress use the GDP to plan budget and tax policy. The Federal Reserve uses GDP statistics when establishing monetary policy.

When Was the GDP Introduced?

The concept of GDP was first proposed in 1937 in a report to the U.S. Congress in response to the Great Depression, conceived of and presented by an economist at the National Bureau of Economic Research (NBER), Simon Kuznets.

The Bottom Line

Economists measure economic growth using the Gross Domestic Product.?GDP counts all output that is generated for sale in the market. An economy is considered to grow when its productive capacity increases. Asset-price inflation is the nominal rise in the prices of stocks, bonds, derivatives, and real estate. Financial assets are not included in the GDP. Rising asset prices can be a misleading sign of a growing economy.

Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.

  1. Forbes. "Will the Real Inflation Please Stand Up?"

  2. Economics Observatory. "How Does Inflation Affect Asset Prices?"

  3. U.S. Bureau of Labor Statistics. "Consumer Price Index Frequently Asked Questions."

  4. World Bank. "Exploring the Link Between Rising Inflation and Economic Growth: The Role of the Banking Sector."

  5. Bureau of Economic Analysis. "U.S. Economy at a Glance."

  6. Bureau of Economic Analysis. "Gross Domestic Product."

  7. Bureau of Economic Analysis. "GDP: One of the Great Inventions of the 20th Century."

Open a New Bank Account
×
The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace.
Sponsor
Name
Description