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Relating commodity prices to underlying inflation: the role of expectations

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  • J. Scott Davis

Abstract

Temporary supply factors may boost some commodity prices—a drought in the Midwest can jolt food costs, or a conflict in the Middle East might propel oil higher. These, in turn, can increase the overall consumer price index (CPI) and the headline inflation rate. ; Because central bank anti-inflation measures sometimes take a long time to affect prices, policymakers don’t necessarily react to short-term fluctuations in headline inflation (an overall rate that’s not seasonally adjusted). In fact, the mandate of many inflation-targeting central banks is to aim to keep headline inflation at a certain target or within a certain range “over the medium term,” widely recognized as a few years. Thus, even a strict inflation-targeting central bank doesn’t aim to contain short-run headline inflation fluctuations.

Suggested Citation

  • J. Scott Davis, 2011. "Relating commodity prices to underlying inflation: the role of expectations," Economic Letter, Federal Reserve Bank of Dallas, vol. 6(dec).
  • Handle: RePEc:fip:feddel:y:2011:i:dec:n:v.6no.14
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