All of these ways of looking at asset prices provide some information about the future inflation environment within our 18- to 24-month horizon for inflation targeting. But the broader question is, Are there ways in which asset prices can give central banks information about price pressures beyond this medium-term horizon? If so, what should be done about it?
Let me give you a more concrete example. Consider the following scenario for an inflation-targeting central bank. Let’s assume that inflation is near its target, but demand in the economy is weak, and the output gap is widening. This situation would normally call for an easing of monetary policy.