The Federal Reserve bases its easy money policies in part on the fact that its favorite measure of inflation has been more than half a percentage point below its target for several years.
With inflation so low for so long, the thought continues, the Fed may keep 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 sets 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 risen much faster for investment assets, such as houses and stocks, and have twice led to booms and downs followed by recessions.
If the Fed has problems with the low interest rates it helped to engineer, it may be because of asset prices and not consumer prices.