Question

Why might disinflation prove favorable to financial assets?

Short answer

Disinflation prove favorable to the financial assets because softening in price reduces the perceived need to hold the real estate as a hedge against inflation. Hence, the shifting back and forth by investors between the financial and real estate may occur many time during the operating cycle of the business under disinflation.

Step-by-step solution

Financial assets

Financial assets are the non physical assets whose values are derived from the contractual claims, such as bank deposits, bonds, etc.

Effect of disinflation on financial assets

The effect of disinflation is favorable for the financial assets because the moderate price of the assets may reduce the need to hold the asset as hedge. Hence, the movement between the real estate and the financial assets are undertaken many time during the reporting period of the company.