International crude oil prices recorded an annual average increase of around 17 per cent during the 2000s as against only a modest increase of 2 per cent during the 1990s and a decline of 3 per cent during the 1980s. This obviously is the outcome of structural changes in supply and demand for oil.
Monetary policy has to recognize these underlying trends and respond to them. If it looks upon these trends as pure transient supply shocks and ignores them, it runs the risk of destabilizing inflation expectations. 9. And now about the second assumption – of supply shocks not usually acting alone to stoke inflation.