Most inflation targeting central banks target consumer prices. I have no idea why, I can’t find anywhere anything which explains why they do not target a broader set of prices. And just targeting consumer prices might lead central banks astray: when the ECB twice increased the interest rate in 2011 consumer prices where showing an increase slightly above the ECB target – but the price level changes of government consumption (primary education etcetera) and investment in fixed assets were at a historical low! Small wonder that the ECB had to lower interest rates later that year.

But there is more to this. Minsky teaches us that the economy has two price levels, one for current output (i.e. consumer goods, investment goods, education etcetera) and one for existing capital goods. These price levels are related in many ways – when prices of existing assets are high, relatively to prices of current output, investment will increase and vice versa! but do show separate developments. Bringing Minsky up to date we might compare Eurozone house price inflation (houses are our most important asset) with the price level of current investment (not just houses, of course). Minsky was right: divergences between changes of these two price levels neatly coincide with booms and busts! One can find somewhere something which tells central bankers why they should not just target consumer prices (which of course has to start before the boom!).

p.s. Woodford seems to be of the opinion that central banks should target ‘sticky’ prices, like wages and rents, because flexible prices, like oil prices, can adapt faster. The dog should wiggle the tail, not the other way around. But the point of Minsky is that asset prices are related to but have a fundamental different role and ratio in the economy than current output prices: it’s not about wiggling but about positive or negative interaction .