You have it backwards. Rising inflation does not create asset bubbles. In fact, rising inflation has the ability to deflate asset bubbles.
For example, we are arguably approaching an asset bubble right now because of a decade of low inflation and low interest rates. In a zero inflation, zero interest rate environment nobody is incentivized to hold cash(since it returns zero) or CDs thus risk assets (ie. stocks) become inflated.
I can think of three recent examples where inflation/soft money policies triggered asset bubbles:
- gold from late 1970s to early 1980s (CPI inflation)
- US real estate late 1990s to 2008 (excessive loan origination)
- US stocks from mid 1990s to 2001 (lax margin requirement)
For example, we are arguably approaching an asset bubble right now because of a decade of low inflation and low interest rates. In a zero inflation, zero interest rate environment nobody is incentivized to hold cash(since it returns zero) or CDs thus risk assets (ie. stocks) become inflated.
An inflation rate of zero would incentivize many people and groups to increase cash holdings. With no inflation to keep at bay, cash becomes a real no-risk bet.
Those doing so would no doubt the interested in real rates of return. For years, investors in CDs endured a negative real rate of return due to inflation. This forced people out of cash and into ever-risker assets.
Throw in mild deflation, and the average Joe could make a real return of a percent or two just by holding cash. It could trigger a stampede of sorts into cash and out of stocks, which explains why central banks are so keen to avoid even mild deflation.
For example, we are arguably approaching an asset bubble right now because of a decade of low inflation and low interest rates. In a zero inflation, zero interest rate environment nobody is incentivized to hold cash(since it returns zero) or CDs thus risk assets (ie. stocks) become inflated.