Consider price surprises coming from the most volatile components of the consumer price index—components such as fruits and vegetables or fuel oil and natural gas. As our operating guide, we use a measure of core inflation that excludes these components. This gives us, and economic observers, some confidence that we are looking at something close to the underlying trend of inflation.
Thus, our interest rate response to price shocks that are perceived to be temporary can be minimal. As a result, there will be little effect on output. In other words, monetary policy does not turn temporary supply shocks into something that is destabilizing for aggregate output.