How asset-price inflation and economic growth differ

Most economists track real economic growth by measuring the change in the gross domestic product (GDP) and then adjusting for inflation. On the other hand, asset-price inflation refers to a nominal rise in the prices of stocks, bonds, derivatives, real estate and other assets. Ordinary goods and services are excluded and do not count as assets in this sense. Most standard measurements of inflation, such as the consumer price index (CPI), do not account for rising asset prices.

While GDP won't see a direct increase from the value of a stock rising from $25 to $30, the seller of the stock will now own additional cash. That cash can be held or used to save, spend or invest. It's likely that, at some point down the road, that extra cash will be used to purchase additional goods or services. This can grow GDP. A similar effect can be produced by any appreciating asset.

Real economic growth doesn't result from more money changing hands. Workers don't become more productive and the standard of living won't rise just because the Federal Reserve adds to the monetary base and hands out lots of dollar bills, so to speak.

An economy grows when its productive capacity increases. Real items – not money – represent real wealth and rising standards of living.

In an attempt to quantify this, economists track the total value of all final goods and services produced through GDP. It's a rough proxy, but it's the most common figure.

Rising asset prices are potentially misleading signs of a growing economy. Even if the stock market grows or houses are more valuable, no real economic goods are directly produced. Those values are very sensitive and volatile, possibly creating the illusion of growth through asset bubbles.