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Effect of linkage between stock prices and inflation expectations

Effect of linkage between stock prices and inflation expectations

with the stock and real estate prices soaring and inflation expectations and asset prices and consumer prices began to produce a certain degree of interaction. Stock and real estate prices soaring and linkage effects of the formation of inflation expectations is a coincidence? The persistence of inflation expectations will have what effect on the stock market? Bank is the need for stock market regulation measures?   Author of this brief analysis.

stocks increased inflation expectations

higher financial asset prices lead to higher prices for future products services expectations, there are many channels, the most common is wealth-effect theory, that asset prices can lead to consumption growth.   Due to rising asset prices and investor wealth increased as consumption is an increasing function of income and wealth, so consumption increases.

one is to increase the disposable income of households to stimulate consumption, consumption by influencing residents ' actual income. In a not very long period of time, the consumption tendency is a constant, is the most decisive factor in consumer disposable income.   Stock market prices so that investors get capital gains and capital gains not included in income this indicator in the national accounts, but it in fact constitutes a part of residents ' disposable income, and have an impact on consumption.

second is through the impact on people's income is expected to increase consumption. Income anticipated changes will change the existing marginal propensity to consume, even in the case of disposable income unchanged, income expectations also prompted residents to expand consumer spending.   Stock market is considered a barometer of long-term economic development, "bull market" with good macroeconomic situation, will certainly enhance the confidence of residents and businesses, residents ' income expectations also improved, so as to boost investment and consumer spending, boost economic growth, and form a good interaction between macroeconomic and market effects.

if rapid growth in asset prices and the private sector expected future products services prices, the feedback effect will lead to higher actual inflation.   Under normal circumstances, this information will affect the Central Bank's expectations of future inflation.

inflation is expected to accelerate market

theoretically, on the one hand, rallied and wealth so that consumers are able to spend on the other, when consumption grew faster than production growth, which in turn would increase corporate profits and employment, corporate profits weighing on stock prices continue to rise, increased employment and income and to stimulate the demand for stocks and stock prices continue to rise.   This change in the same direction might formed a circle.

the next two years, China's economic growth cycle, ample liquidity under pattern unchanged, inflation Outlook depends primarily on cost. It can be argued that resource prices will rise, labour costs will also rise upward shocks in agricultural prices is very high, compared with the 2003 Flash in the Pan, the persistence of inflation is more powerful. The author believes that moderate inflation to stimulate consumption and high inflation depress consumption. At the beginning of inflation, currency devaluation effects stimulate the monetary funds and fixed-income assets turned to higher-yielding real estate and stock markets.

statistics show that so far this year, urban and rural residents ' savings growth rate slowed, the stock market significantly increased the average daily stock, fund accounts. Although 5 consecutive rate hike since 2007, but higher interest rates to stabilize the savings effect is very limited, diversion of urban and rural residents savings and investment trends are hard to change.   Thus, the sustainability of inflation expectations, in turn, is likely to accelerate further stock market gains.

in addition, services and financial assets price change there is often inconsistency, sometimes have a greater degree of divergence. In real life, we often note that product services price index continues to remain low, and stock price index has continued to rise.   This is because based on technology, the role of market competition and other factors make our products services prices, far more than the wealth effect of making it up, results are still products services prices index remained low.

index is included in the price

as is well known, the monetary authorities should focus on price indices.   Theoretically, monetary authorities should focus on asset prices, not only because stock prices can affect inflation expectations, and because the CPI price index is flawed.

However, the stock price index included in the price index, in terms of policy tools and techniques there are many difficulties. Real estate and stock prices are not included in the CPI for many reasons, first, the theory remains controversial, asset prices are far more important in people's lives rather than consumer goods, real estate, stock prices are not entirely reliable indicator of change in asset prices.   

Second, is not technically feasible, real estate prices and stock prices and inflation expectation factors unrelated to changes, such as the risk appetite of investors and improved income expectations will influence the company's share price.

based on the above reasons, the Central Bank in dealing with the relationship between asset prices and inflation, and respectively caused share prices rise and prices fall when taking countermeasures faced a dilemma. If the index is based on prices for general product services technology and market competition, rather than monetary factors, expansionary monetary policy not only cannot price index increases, it will stimulate further price rises, enlarge market bubble.

If the stock index is the result of excessive speculation, the tight monetary policy implemented in driving down the price at the same time, will depress consumption demand and investment demand had a negative impact on the real economy and stifle economic growth. Therefore, the recognizing cause different changes the nature of the two are very important.