Monetary policy then needs to avert temporary inflation increases that lead to second-round effects in wage and price-setting behaviour, for instance due to the indexation of wages and prices to past inflation. Today’s discussion on how to react to rising commodity prices reminds me of that prevailing in the 1970s.
In the aftermath of the oil price shocks of 1973 and 1979, inflation in the OECD countries increased dramatically from already relatively high levels 5.7% in 1971 to doubledigit numbers 14.8% in 1980.