Asset Prices And Inflation Measure

The debate over including asset prices in the construction of an inflation measures has attracted renewed attention in recent years. It is important for the central bank to decide whether asset prices should be included in the inflation measures . In this article, we first survey the alternative theories of incorporating asset prices into price indexes, and then examine the relative practices, base on the theory and practice, we analyze this problem more comprehensive to get a clear conclusion.At the end of this article, we come to the conclusion that,(1) the theories of incorporating asset prices into inflation measures include theory of proxy for futures price, theory of information for monetary policy, theory of excluded good bias. To the theory of proxy for futures price theory, it is reasonable for including futures price in the price indexes for the purpose of measuring the cost of life , but asset prices can't be used as a proxy for current futures prices under some limitations. To the theory of information for monetary policy, there are differences among different countries and different assets, the existence of information for monetary policy should be examined carefully.(2) As practice difficulty, the indexes incorporating assets are improper for using as the main index. It is just a reference information for measuring the change of cost of life.(3) For the treatment of owner occupied housing in China, it is should take the rental equivalence approach using the hedonic regression model to impute the equivalence rental .