What Is Asset Inflation and How Does It Impact Investments?

Asset inflation allows investors to make considerable gains from rising asset prices. But the sustained hike in asset prices is not always a lucrative investment opportunity.

While alternative assets like wine offer you evergreen investment windows and good inflation protection, investing in real assets (stocks, bond, real estate, and oil) doesn’t always shield you from inflation risk.

Let’s explore asset inflation, how it impacts economic growth, and its effect on your investment portfolio. We’ll also check out how investing in wine can help you achieve financial stability and how you can start your wine investment journey with Vinovest.

What Is Asset Inflation?

Asset inflation is the increase in the value of assets. 

It usually occurs when the Federal Reserve Bank (or any central bank) lowers interest rates through different monetary policy amendments. With the reduced interest rate, you cannot accrue substantial returns from traditional fixed income investments like Treasury Inflation Protected Security (TIPS), savings accounts or government bonds. 

In such cases, you may turn to real assets like real estate, gold, or stocks to secure more gains. This, in turn, will push up their prices and lead to asset price inflation.  

Let’s say a house costs $500,000 this year. Given investors’ growing demand for real estate, the same property may be priced at $650,000 next year. This sharp increase in asset values is an example of asset inflation. 

Besides such conventional assets, art, luxury watches, and fine wine are attractive alternative assets as well.

Asset Inflation vs Price Inflation

While asset inflation deals with a rise in the cost of assets, price inflation refers to the overall spike in the prices of goods and services in an economy. Since price inflation focuses exclusively on commodities and services, it impacts a country’s GDP (calculated annually after adjusting for inflation.) 

Most metrics used to measure price inflation, like the Consumer Price Index (CPI), rely on economic activity and don’t account for asset inflation. 

A moderate increase in consumer prices favors emerging markets, but high price inflation erodes your purchasing power, hinders economic activity, and slows economic growth. Persistent inflationary pressure, as indicated in the Consumer Price Index, can undermine a country’s economic progress. 

But does asset inflation have an impact on economic growth?

Let’s find out. 

How Does Asset Inflation Affect Economic Growth?

Continuous inflationary pressure on asset prices can create a high inflation bubble, giving you the illusion of growth even in times of volatility.

But unlike inflation in consumer prices, rising asset prices don’t directly impact economic growth. 

For instance, if you liquidate a high-value asset, you’ll possess significant capital on hand, which can then be spent, saved, or invested. Whatever you choose to do, the cash will indirectly be re-invested in the country’s economy, contributing to its GDP growth.

Another impact of asset price inflation is the rise in the value of net household wealth – a potential indicator of households’ consumption choices in emerging markets. 

Impact of Asset Inflation on Your Investments

Here’s a closer look at the impact of asset inflation on the different investment instruments:

1. Stocks and Bonds

During high inflation periods, the Federal Reserve Bank or any central bank would tweak their monetary policy to reduce their interest rate, causing an increase in stock and bond prices (like Treasury Inflation Protected Security and government bonds.) 

In the short term, rising asset prices can scale up your returns. 

However, a bull market isn’t sustainable if the economy suffers a downturn. If higher inflation persists, it’ll eventually impact investors’ gains, leading to a drop in the prices of this asset class.

2. Real Estate

Rising real estate prices have contrasting impacts on homeowners and renters. 

If you’re a homeowner, a hike in house prices increases your home value in financial markets and brings in more rent. But if you’re a tenant, a higher inflation rate in property prices causes a spike in your rent and also makes buying your own house a costly ordeal. 

Depending on your long-term goals, you can invest in a real asset like real estate when the market is slow and hold it till your asset values leap. A piece of sound investment advice is to rent your property during inflation to yield a higher fixed income till you’re ready to sell.

3. Gold

Gold is a real asset class used by investors as an inflation hedge. But the rising gold prices also indicate a high inflation rate and falling currency value. For example, you may invest in gold when it’s comparatively cheaper, hoping to earn high returns when prices rise. However, during rising inflation, though the cost of your gold holdings increases, the depreciating currency (especially the US dollar) undermines its value. 

4. Wine

Unlike the conventional asset classes described above, wine is an alternative asset that can be your viable bet against rising inflation. Wine prices are on an upward trajectory, and are less affected by market volatility, providing you good financial stability. Over the past two decades, the Liv-ex Fine Wine 100 index rose by 270.7%, outperforming the S&P 500 index (indicating the performance of the traditional financial markets.) 

Wine is also a low-risk investment compared to real estate. While the property market transaction volume declined by over 26% during the COVID-19 pandemic, the Liv-ex 1000 wine index fell by only 4%.

And fine wine offers an average annual return of 18% to investors – much higher than the 10.6% return from gold.

But how do you begin investing in a lucrative asset like wine?

Build a Wine Portfolio as an Asset Inflation Hedge  

If you wish to build a wine portfolio as an inflation hedging strategy, visit the Vinovest website. Vinovest is a modern, AI-driven wine investment platform that lets you buy, store, and sell high-quality wines from all over the world.

With Vinovest, you don’t have to be a wine connoisseur to have a successful wine portfolio. 

The platform offers you several benefits like:

• Best Prices: Vinovest sources wine bottles only from authentic wineries, auctions, and wine exchanges, offering you the best quality at fair market prices. 
• Easy Buy And Sell: Theuser-friendlyVinovest platform makes it super easy for you to buy and sell the finest wines with just a few clicks.
• Provenance And Authenticity: The wine experts at Vinovest track the provenance of every wine bottle, eliminating your chances of buying a counterfeit bottle.
• Optimal Storage: Your wine collection is stored in state-of-the-art and temperature-controlled, bonded warehouses. 
• Expert Advisors: A dedicated team of Master Sommeliers, data scientists provide investment advice to ensure you add the best wines to your collection.

Counter Asset Inflation with a Fine Wine Collection

Asset inflation has its share of benefits and drawbacks for investors, making it challenging to pick the best asset to invest in. Of all the viable alternative investment options, fine wine is almost foolproof in yielding potentially high returns with maximum inflation protection.

If you’re targeting inflation hedging and hoping to collect high-return wines, sign up with Vinovest and start building your portfolio today.