Inflation problems depend on where you look for them

The Federal Reserve attributes its easy monetary policy in part to the fact that its preferred 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 goes, the Fed may keep interest rates very low for a while to help stimulate the economy as it recovers from the effects of the coronavirus pandemic.

This raises an important question: Is the central bank thinking correctly about inflation?

The Fed sets its inflation target in terms of consumer prices, like the prices we pay for cars, toothpaste, and haircuts. But over the past few decades, prices have often climbed much faster for investment assets, such as homes and stocks, and have twice led to booms and collapses followed by recessions.

If the Fed is having trouble with the low interest rates it helped design, it may be with asset prices, not consumer prices.