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Relating commodity prices to underlying inflation: the role of expectations

  • J. Scott Davis

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.

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File URL: http://www.dallasfed.org/assets/documents/research/eclett/2011/el1114.pdf
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Article provided by Federal Reserve Bank of Dallas in its journal Economic Letter.

Volume (Year): 6 (2011)
Issue (Month): dec ()
Pages:

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Handle: RePEc:fip:feddel:y:2011:i:dec:n:v.6no.14
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