This relationship – which likely reflects, among other things, a tendency for firms’ costs to rise as utilization rates increase – represents an important channel through which monetary policy influences inflation over the medium term, although in practice the influence is modest and gradual.
Movements in certain types of input costs, particularly changes in the price of imported goods, also can cause core inflation to deviate noticeably from its trend, sometimes by a marked amount from year to year. 17 Finally, a nontrivial fraction of the quarter-to-quarter, and even the year-to-year, variability of inflation is attributable to idiosyncratic and often unpredictable shocks.