Welcome back to Gary's Economics.

Today we are going to talk about asset price inflation.

So the main thing I want to explain

today is the difference

between asset price inflation

and goods and services inflation,

which you might call shop price inflation and why it is important.

The first obvious thing to say

is the rate at which asset price increases

is not always the same as the rate

at which prices in the shops increase.

And in general, in the last 20, 30 years,

there's been a significant trend for assets

to increase more quickly than

goods and service prices, and also wages,

which has, of course, made housing less affordable.

The first thing you need to know

is in the main measures of inflation,

which you will see on the news.

The most well known one is CPI,

consumer price inflation.

But you might also see RPI, retail price inflation.

These measures of inflation

only look at the prices of goods in the shops,

the regular things that you buy

and also services, transport,

basically your regular expenditures,

but they do not look at asset prices.

So these measures of inflation

do not look at asset prices,

which means that these measures of inflation,

I would argue

they basically underestimate actual inflation

because I think house prices and other asset

prices are a part of inflation.

But these are only looking at prices in the shops

which are going up more slowly.

So the second thing is

in my opinion,

there is a structural tendency in our economy

for asset prices to go up more quickly

than shop prices.

And the reason for this is, in my opinion,

growing inequality.

Now, I have looked at this for a very, very long time.

This is actually what I wrote my thesis on at Oxford,

which is on my website if you want to look at it,

I'll put a link in the comments.

The reason for that is very simple.

So ordinary people

spend almost all of the income

they receive in their lifetime.

This means that over the course of their life,

everything they receive,

they spend on goods and services.

Rich people act very differently.

They spend the majority of their

income on buying assets.

The richer you are,

the greater percentage of your income

you are likely to spend on assets

and the lower percentage of your income

you're likely to spend on goods and services.

So as an economy becomes more wealth unequal,

what you then have is a greater share of the assets

and a greater share of the purchasing power

being held by the rich and the very rich,

and a smaller share of the assets

and the purchasing power being held by ordinary people.

Since ordinary people

like goods and services and rich people like assets,

as the economy becomes more and more equal,

the society as a whole will start to desire more assets

and desire less goods and services, which means that

asset prices tend to increase

relative to wages over time.

This makes housing increasingly unaffordable

over time in a way

that basically tends

to get often ignored by economists,

because economists focus only on

shop price inflation, CPI inflation.

So housing just gets more and more unaffordable

and basically nothing gets done about it.

The next thing you need to understand

is that central banks

such as the Bank of England here in the UK

or the Federal Reserve in the US,

they try to keep inflation at a 2% level,

but when they talk about inflation,

they are only looking at

shop price inflation, wage inflation.

They are not talking about inflation.

So basically the central bank,

not only is it doing

nothing to

stop housing from becoming more unaffordable,

in a sense it's exacerbating the problem

because while they

almost completely ignore rising

asset prices, rising house prices,

they are pretty much refusing to allow wages to rise

more than 2% or 2.5% a year.

So this creates a structural problem.

We have a system

in which

it is almost inevitable

that housing will become more expensive over time

and we are not allowing wages to rise.

So we can kind of see inevitably

this gap will increase.

But we have a double problem.

So as house prices go up and wages

don't go up as quickly,

there's only basically two ways to fix this problem.

One is more rapid increases in wages,

which the central banks won't allow,

and one is falls in house prices.

So if you have rapid falls in house prices,

which is what we would need

to make housing significantly more expensive,

this causes massive problems, essentially.

We see these kinds of collapses.

People buy houses with big mortgages.

So if your house price suddenly collapses,

you are basically immediately bankrupt

because you've bought a half million

pound house, you borrowed £450,000.

Now your house is worth only £300.

Your net worth is -150.

So people immediately become bankrupted

and it can cause massive economic problems.

So basically, we've created an unfixable problem.

We need wages to go up, central bank won’t allow it.

We need house prices to come down.

If house prices come down quickly,

it causes an economic collapse,

causes people to be bankrupted.

So the situation is essentially unfixable.

And I think the way that you fix

it is basically to understand that inflation is not one

single measure, right?

It's not just simply CPI.

What you have is three different things, essentially.

I think three different main categories of inflation

you want to look at, which is goods

and service inflation.

And within that we can divide luxury goods

and services and essential goods and services,

wage inflation and asset

inflation like house prices inflation.

Now, the kind of inflation

that we've had in the last four or five years

is basically the worst possible kind of inflation.

It's been driven

primarily by

goods and services,

especially basic essentials like food and energy.

Wages have lagged behind,

which means ordinary people's

living conditions have fallen,

and yet houses

have become extremely more expensive in that period.

So it is the worst possible

combination of inflation for ordinary people.

But it's probably worth bearing in mind

that it's a really good combination

for people who own assets and consume labour.

So if you're a very wealthy person,

you own a load of assets,

you own a lot of natural resources,

and what you do is you consume other people's labour,

then your situation is great

because the things you own have become more expensive

and the workers

who you might use to do your goods and...

to do your services have become cheaper.

In a sense, it's a kind of a

you could describe it as a class warfare

kind of inflation.

And we've kind of built that into the system

we have baked into our system

a kind of inflation where assets,

which is a measure of the power of the rich, continue

to become more expensive,

whereas wages,

which is a measure of the power of ordinary people,

are basically not allowed to go up by the central bank.

I think it should be obvious

the best way to fix

the housing crisis is to stabilise

house prices and encourage specifically wage inflation.

Now, there is no other way to make housing affordable.

And I would encourage economists to think about this.

It's the only way to fix it, really.

You need to get wages to go up.

I think the best way to make wages

go up and house prices not go up

is to move that spending power back.

Ordinary people buy goods and services.

You as a worker, produce goods and services.

If you get money into the hands of ordinary people,

they will buy the stuff you produce

and your wages will go up.

If instead we put all the money

in the hands of the rich.

They will buy assets. They will buy your houses.

Housing will become more expensive

and they will become stronger.

You will become weaker and you will lose your house.

So that's it, basically.

To conclude, there's not just one measure of inflation.

Asset inflation is very important,

the kind of inflation on the news

only ever looks at goods and services

and wage inflation is important as well.

Secondly, not all kinds of inflation are bad

If your wages are going up

faster than the price of goods and services

and faster than the price of housing,

your life will get better.

If housing and goods and services

are going up faster than the price of your wages,

your life will get worse.

I want your life to get better.

So let's ask for higher wages

and let's not accept the myth

in the media that if your wages go up, it's bad.

Pretty obviously your wage going up is good,

especially if they're going up faster than house

prices and goods and services.

And the way to do that

is to take purchasing power away from the rich,

put it in the hands of ordinary people.

And the way to achieve that is to tax the rich more

and to tax you and ordinary working people less.

We campaign for that on this channel every week.

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