[PEN-L:4550] Interest rates in the CPI

[Bill Rosenberg <w.rosenberg@xxxxxxxxxxxxxxxxxxxxxxx>]

It has just been announced here in New Zealand that interest rates
will be removed from the Consumer Price Index. The Reserve Bank
Governor says "Most economists are agreed that interest rates should
not be in the inflation figure and many major countries already
exclude them."

Can someone explain the pros and cons of this?

The Bank already uses CPI with interest rates excluded ("CPIX") to
define its inflation targets. This action makes the two the same.

On first glance it seems to me that since interest rates
significantly affect cost of living, even if they are correlated
with other things like rent and house prices, they should be in
there. After all, many prices are correlated. Do they exclude bread
because flour is in the index?

Bill