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.
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.
There is a similar trend of rising rent and property prices in other developed economies, such as Britain and Europe. Ample liquidity from the Fed and central banks globally could also fuel asset inflation around the world. This could come in the form of higher asset prices, or investors willing to take more risks to meet their return expectations.
Central banks are currently not well equipped to address asset inflation, since their primary focus is consumer prices. Thus, investors will need to remain alert for lurking inflation risks in what is sure to be a bumpy environment.
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