The Fed is not just looking at the outlook for core inflation – it is looking at the forecast for headline inflation. That is my interpretation of Bernanke’s speech today, in which he said “many factors affect inflation, including…the prices of oil and other commodities.”
The Fed chief, you may recall, edged the Fed away from an exclusive focus on core last year. This is not to say that the US central bank will now respond in a knee-jerk way to first round effects of an oil price shock. But the Fed will not just ignore commodity price movements – particularly if there is evidence that commodities are on a rising trend for global demand reasons.
I think this is entirely appropriate. Yes, commodity price strength is to a large extent a relative price shock. But so was disinflation in manufactured goods produced in emerging economies like China. You can’t ignore one and pocket the other.