Why the ECB should not just track consumer prices
In a comment on this post C. Rademaker is a little angry that I mix up the consumer price target of the ECB (moins de 2%, proche de 2%) with a GDP-deflator. To an extent, Rademaker is right. As it indeed is, to an extent, a rhetorical trick. But it’s not just a trick – or, well, it is but it’s meant to hammer down the difference between consumer price inflation and ‘broad’ inflation. We describe the economy with the national accounts, which estimate quite a lot of different price indices: consumption, investment, government expenditure, exports, imports etcetera (yes, squares with Y = C+I+G+Ex-Im). Just paying attention to one of them would be right if differences were small. But after 2008, differences became large.
The ECB really should start to track GDP-inflation, too, instead of just consumer prices. And they will. After 2008 inflation differences between the various components of domestic demand have become exceedingly large and can’t be ignored anymore. You do not want to increase the interest rate when consumer prices go up while all other prices go down! And something like that is happening. In the third quarter of 2012 Spanish consumer prices rose with 2,8% – but prices of gross investments (mainly buildings) declined with 2,5%. Consumers are paying the price of austerity!