He argues that a central bank should aim at core inflation because (i) it cannot effectively control headline inflation given its inability to offset supply shocks; (ii) it can better forecast future headline inflation on the basis of past core-inflation dynamics, and (iii) targeting core inflation is likely to result in more sensible monetary policy in the presence of supply (energy price) shocks.
The most obvious is a pronounced worsening of the international environment, which would affect our energy and non-energy exports and weaken consumer and business confidence – the kind of scenario, we faced in late 2008 and the first half of 2009.