Reduced-form regressions suggest that the response of core inflation to energy prices has diminished over the past twenty years. Does this smaller response reflect a change in the expectations formation process that has come about because the public perceives that inflation will remain low, perhaps because the monetary authority is now seen to be more vigilant in reacting to price pressures?
Or does it reflect a reduction, from the late 1970s until a couple of years ago, in the persistence of energy price movements that has prompted firms to be less worried about passing temporary cost increases onto customers?