The setting of interest rates (or "repurchase rates") varies from country to country, as well as with the independence of the central bank.
There are a number of measurements and indices that central bankers can take into account:
- Consumer Price Inflation (CPI): An official "basket" of consumer items is set and each month the price of these is compared to the previous month and the rate of inflation (/deflation) calculated. Each country varies, some include house prices (for a defined type of house) others include rental costs. There are even different types of CPI (urban vs rural plus different product mixes). It should be clear, given this variability, that different people could choose different (and both official and consistent) measures of CPI to suite their objectives. Given this "bias" it is essential that both central banks and statistics collection be impartial.
- Producer Price Inflation (PPI): Companies prefer to keep prices consistent and so pass on costs (or benefits) to their customers fairly slowly. There can be quite some lag stored up at the factory-side of production that could result in tremendous inflation sometime in the future. PPI attempts to gauge how much stress is being built up in an economy that could result in price rises, employee layoffs or even insolvencies. It is, similarly to CPI, based on a basket of goods.
- Money Supply: This is a measure of the amount of money available in an economy (and, again, there are numerous different definitions and baskets for analysis). A rapid growth in money supply but with minimal economic growth is likely to lead to increased PPI and CPI. Money supply can include credit demand. Credit spent on consumption is different from credit spent on capital. So money supply is simply an early indicator of potential trouble.
- Exchange Rates, GDP and Unemployment: The legislature can instruct the Central Bank regarding which factors to prioritise in setting interest rates and monetary policy. Any set of criteria can be used and, aside from the majors listed above, exchange rates, GDP and unemployment are also commonly included. Increased interest rates result in higher yields and may cause an inrush of "hot" short-term investments which can cause the currency to strengthen (which may result in higher inflation from imports, or trigger local production owing to import substitution).
This is a limited overview but should give an indication of just how complex tracking inflation is, let alone attempting to control it. House prices are in the mix but which house or which price?
The choice of what to measure faces the difficulty of attempting to find a symmetrical basket which really affects the majority regularly (and not everyone is buying several new houses a year so the majority are ring-fenced from fluctuations in prices at the capital end, but not from the interest-rate end).
And this is only when the various agencies (Statistics, Central Bank, Labour, etc.) are independent. In countries like Venezuela or Argentina, government has taken over release of such data and it is frequently at odds with individual experience.
Links for the US:
And, for Australia: