On Nov 21, 2007 2:29 PM, Jim Devine <[EMAIL PROTECTED]> wrote: > strictly speaking, a stock market bubble has no effect at all on the > CPI or the PCE and thus has no effect at all on the inflation rate or > the core inflation rate. Stock prices are not directly connected with > the prices of consumer goods, which is what are measured by the CPI > and PCE. > > strictly speaking, a wage increase does not show up in the CPI or the > PCE unless employers pass the increased wage on to consumers by > raising prices. If the latter is true, workers should care, since it > indicates a big element of futility in the wage struggle -- and the > need to get beyond a mere struggle for higher wages (Gompers' "more"). > > > Isn't there a problem with setting monetary > > policy on this basis? > > I think the Fed cares about wage inflation independently of the CPI or > PCE. If workers stick their heads up, the Fed will stomp on them (all > else constant). >
Jim, You are right that the Fed's concern with wage increases is probably separate from its effects on the CPI. I also agree with your comment that "strictly speaking, a stock market bubble has no effect at all on the CPI". I'd say that's exactly what is wrong with the CPI. I think everyone from libertarians to Marxists can agree that price stability and a stable currency are good things. Therefore it is legitimate for the Fed to keep inflation under control. The important thing is what measure of inflation should be used, and what is the effect of monetary policy based on each inflation measure e.g. the CPI. The effect of the current monetary policy is to keep wage increases subdued while encouraging or at least being indifferent to asset price increases, whereas we would want the exact opposite: a Fed that increases interest rates if asset prices are inflating and stay indifferent to wage increases. I blame this at least partly on the flawed index being used i.e. the CPI and to that extent I think Farrell has a point. -raghu.
