There has been plenty of talk about the RBA targeting asset prices by leaning against bubbles. All reports are that this is unlikely to happen in the foreseeable future. And for good reason.
They would face two problems;
a) identifying bubbles, and
b) using an economy wide instrument, interest rates, to target asset prices in an individual sector. All other sectors will suffer as a result.
But after thinking about this after footy last night, doesn’t inflation targeting automatically lean against asset price bubbles if they appear in a broad range of sectors?
Think about it. Asset price increases flow on to the price of consumer goods. Property price rises are the simplest example. Commercial property price increases have increased the costs of business, for everyone, which eventually flows though to retail/consumer prices. I don’t have much data at hand, but it would appear that asset prices are a good leading indicator of inflation. When interest rates are increased to curb inflation, they also curb asset price growth.