Underlying inflation In thinking about targeting inflation over time, an aspect that has received a lot of attention recently is underlying inflation: the inflation rate that would prevail in the absence of various sector-specific and one-off factors that can affect the measured CPI from month to month.
Conceptually, underlying inflation should be driven mainly by the amount of excess supply or demand in the economy, together with the public’s expectations of inflation. Underlying inflation has been a particularly important concept this year. We have the impact of the oil price shock, which is pushing inflation down via prices of gasoline and other consumer energy products.