Rather, a variety of factors has caused inflation to deviate from expectations.5 At times, demand was not as robust as anticipated, and unexpected but persistent changes in the foreign exchange value of the dollar and oil prices fed through to core CPI inflation on several occasions.
But I will concentrate on one general phenomenon and two episodes that help illustrate how our understanding has evolved and some of the more general challenges for inflation forecasting over the past twenty years. One factor that may account for some of the upward bias over this entire period was a gradual reduction in the natural rate of unemployment.