raghu wrote: > Fair enough. I have no quarrel with the CPI as a cost-of-living measure > (even though I am sure it has some weaknesses there as well). I am mainly > disputing the reasoning behind using the CPI to set monetary policy. This > reasoning as I understand it, is basically that a high CPI indicates a > currency that is losing its value and reducing the purchasing power of > people on fixed income, and also people incorporating expectations of a > currency losing its value into their decision-making.
it's a high rate of _growth_ of the price index that indicates inflation (of consumer prices). These days, the Fed uses the Personal Consumption expenditure deflator rather than the CPI for this purpose. > But does the same logic not apply also for asset prices? If the price of a > house increases 25% in a year, does that not mean a dollar buys (roughly) > 25% less house compared to last year? Shouldn't the Fed try to preserve the > value of a dollar in house-units just as much as in sandwich-units? if you think the Fed should try to prevent asset bubbles, that's fine. But in the late 1990s (a period of asset-price inflation), that would have meant much higher unemployment than was actually seen (unless the Fed dropped their standard methods and did stuff like tightening the margin requirements). In other words, using (standard) macro-policy to deal with asset-price inflation is inferior to imposing financial regulations that prevent bubbles in the first place. > Also a high CPI does not necessarily decrease purchasing power if wages > increase at the same rate. ... right. But if the CPI is rising with money (nominal) wages, it indicates a certain futility of the wage struggle. (Strictly speaking, nominal wages have to rise with labor productivity plus the inflation rate in order to keep real wages growing with labor productivity.) -- Jim Devine / "Segui il tuo corso, e lascia dir le genti." (Go your own way and let people talk.) -- Karl, paraphrasing Dante.
