The strength and the persistence in the rebound of inflation has consistently surprised many analysts and professional forecasters, including us. Unexpectedly high energy costs contributed most to these surprises, yet we do also see that price rises have become more broad-based.
As I will discuss, the new models that researchers have developed in this effort have substantially different implications for the transmission of shocks to exchange rates, consumer prices, and real output than their predecessors, and, in particular, imply that exchange rate changes tend to have much smaller expenditure-switching effects on real activity.