The Federal Reserve predicates its easy money policies in part on the fact that its favorite measure of inflation has run more than a half percentage point below its goal for several years.
With inflation so low for so long, the thinking goes, the Fed can hold interest rates very low for a while to help boost the economy as it recovers from the effects of the coronavirus pandemic.
This raises an important question: Is the central bank thinking about inflation properly?
The Fed defines its inflation target in terms of consumer prices, such as those we pay for cars, toothpaste and haircuts. But in recent decades, prices have often climbed much faster for investment assets, such as homes and stocks, and twice led to booms and busts followed by recessions.
If the Fed does run into problems with the low interest rates it has helped to engineer, it might be because of asset prices and not consumer prices.
