Asset Angst

The 'Other' Inflation

A housing market bubble in Germany is not included in consumer inflation.
  • Why it matters

    Why it matters

    German economists believe the ECB’s monetary policy is driving up asset prices, while consumer prices have remained relatively flat. The new index backs up their arguments.

  • Facts


    • Consumer prices briefly increased by 2.4 percent in 2011, but then declined again and even turned negative at the start of this year.
    • Asset prices, on the other hand, increased by 4.4 percent in the first quarter of 2015 alone, according to the new index.
    • The sharp rise in asset prices is attributed to the ECB’s relaxed monetary policy.
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It has been a perennial concern of German economists: The European Central Bank’s loose monetary policy could be setting the stage for rampant inflation in Germany.

“Hyper inflation” is a term long feared by the German public ever since it experienced skyrocketing prices in the 1920s and 1930s – the kind that forces families to transport cash in wheel barrels to the local supermarket.

It is a fear that helps explain Germany’s reluctance to back the Frankfurt-based ECB, which sets monetary policy for the entire 19-nation euro currency zone, and which has embarked on a series of aggressive moves recently to fight the very opposite of hyper-inflation. “Deflation,” or falling prices, is a danger that is currently threatening much of Europe. Most economies have recovered much more slowly than Germany since the 2008 financial crisis.

So far there has been no proof that the ECB’s policies are leading Germany into any kind of dangerous territory. Annual consumer price inflation briefly rose to 2.4 percent during the course of 2011, but then it declined again. In fact, in January 2015, German prices fell into negative territory.

The picture may now change. For the first time, in a project launched by Handelsblatt, an institute in Germany has sought to measure the rising value of assets in the Europe’s largest economy.

Their results tell a very different story. The new index, which will now be released quarterly, supports the notion that asset prices have increased substantially over the past few years.

“For a long time, the prevailing view among monetary policy experts was that it was important to keep an eye on consumer prices, while the rest would simply take care of itself.”

Thomas Mayer, Director, Flossbach von Storch Research Institute

Asset prices differ markedly from the usual measures of consumer inflation, and could explain where much of the cheap money that has flooded markets since the ECB began lowering interest rates and buying bonds has gone.

While consumer prices may have been stable recently, asset prices increased by 4.4 percent in the first quarter of the year. In fact, assets were 6 percent more expensive on average between the summer of 2013 and the summer of 2014 than in the corresponding period the year before.

“For a long time, the prevailing view among monetary policy experts was that it was important to keep an eye on consumer prices, while the rest would simply take care of itself,” said Thomas Mayer, director of the Flossbach von Storch Research Institute in Cologne and the creator of the index.

Mr. Mayer, a former chief economist of Deutsche Bank and a long-time critic of the ECB’s loose monetary policy, said the sustained rise in the new index suggests the ECB’s approach needs to be reevaluated.

Economists have been railing about the dangers of rising inflation in Germany for the past four years, ever since Europe’s largest economy began to show signs of recovering solidly from the global financial crisis, while much of the rest of Europe remained mired in an economic slump.

In a January 2011 interview, Anton Börner, president of the Federal Association of German Wholesale Foreign Trade and Services, said that Germany could expect to see 4 to 6 percent inflation in the coming years. “And I truly hope that we don’t get double-digit inflation.”


Asset Prices Beat Consumer Prices-01 (3)


He wasn’t the only one to anticipate a speedy rise in consumer prices in the years following the financial crisis. Many economists made similar predictions. For instance, Lüder Gerken, head of the Freiburg-based Center for European Policy, warned against “mega-inflation” in the fall of 2011.

Economic theory seemed to support these predictions, especially with the ECB’s monetary policy being more relaxed than ever before. The more fresh money is pumped into the markets at increasingly low rates, the more likely it becomes that there will be insufficient economic output to offset the amount of money in circulation, causing prices to explode.

Does this mean that monetary policy wasn’t nearly as much of a driver of inflation as expected – and not as dangerous as initially thought? The ECB, at any rate, has seen no reason to deviate from their easy-money policies. On the contrary, President Mario Draghi and other top ECB officials even felt the need to expand the policy by launching a “quantitative easing” program that included buying up large quantities of sovereign debt since the beginning of March.

However, the new index shows that monetary policy may indeed be driving up prices – just for assets instead of consumer goods. Food, clothing and other every-day essentials are not getting more expensive, but real estate prices, equities and art prices are rising fast, despite the fact that the quality of these assets hasn’t changed. This suspicion is supported by the booming blue-chip DAX stock index and the record-high cost of property in large cities.

The new index shows that monetary policy may indeed be driving up prices – just for assets instead of consumer goods.

Until now, however, there had been no suitable and reliable statistic to measure asset price inflation in Germany. The Federal Statistical Office, for example, only issues a consumer price index, and that will not change in the future, according to a spokesman for the agency.

“Until now, little credence has been given to the theory that changes in asset prices could be an independent factor influencing the economy,” Mr. Mayer told Handelsblatt.

In response to suggestions by Handelsblatt, Mr. Mayer and his staff developed the new asset inflation index. The team used raw statistics on individual types of assets to get a more general picture of how they are influencing the economy as a whole.

The institute intends to release the new figures once a quarter in the future.

How this new measure affects consumers will depend on their perspective. Those who own assets benefit from the fact that their value is increasing – if they were to sell their assets, they could buy more goods from the proceeds. But those who are aiming to build assets are at a disadvantage. For instance, the average wage earner must now put in significantly more work to afford a house today than a year ago.

But what does the growing gap between the inflation values for consumer goods and assets mean for the economy? Mr. Mayer is highly critical of the development.

“The economy is doing quite well again, which is why certain increases in prices are understandable,” he said. But the fact that asset prices have risen so sharply, he added, is merely an unpleasant side effect of the ECB policy.

What the data do indicate is a substantial social imbalance, with the assets of the richest households increasing in value at a much faster rate than those of the poorest households. The second-poorest fifth of German households have seen their assets appreciate by only 6 percent since early 2006, compared with about 18 percent for the wealthiest and second-wealthiest fifth of households.


Hans Christian Müller is a correspondent in Düsseldorf working on economics and monetary policy. Christopher Cermak is an editor for the Handelsblatt Global Edition in Berlin, covering finance and economics. To contact the authors: and 

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