In this scenario, it could be argued that one could relax the policy horizon or the target level to accommodate these inflationary shocks with small output costs. However, based on my previous discussion, this could be very detrimental for the future. Giving up on inflation will lead to losing the inflation anchor on expectations, more backward- than forward-looking behavior of wage and price setters, and an increase in output volatility. In other words, we would be achieving an inefficient outcome for monetary policy and losing the benefits of the Great Moderation. Hence, central banks must carefully monitor inflation expectations. However, in the current juncture of extreme uncertainty and inflation volatility, the breakeven measures that compare nominal and inflation protected securities appear to be excessively high world-wide, thus apparently showing an important increase in inflation expectations, which could even reflect the loss of the nominal anchor. This has also been the case in Chile, especially since the deepness of the market of inflation protected instruments tends to make them the natural safe haven. Therefore, in uncertain times like the ones we are enduring today, breakeven measures may increase without necessarily implying un-anchoring expectations, making their timely recognition more intricate. Some could incorrectly argue that a way to avoid the monetary policy reaction to some specific inflationary shocks is to focus inflation control on core rather than headline measures of inflation.
BIS Review 74/2008  9  Figure 5: Food prices (index, January 2006 = 100)  600  600  500  500  400  400  300  300  200  200  100  100  0  0 48  54 60  66 72 78  84 90  96 02  08  CRB Sp o t Ind ex  CRB Fats & Oils Sub -ind ex  CRB Fo o d s tuffs Sub -ind ex  Reuters -CRB Grains and Oils eed s Sub -ind ex  Sources: Commodity Research Bureau, Reuters and Bloomberg. Figure 6: Inflation: Food, energy and rest (annual change, percent) Food and energy  Non food and energy  25  25  25  25  20  20  20  20  15  15  15  15  10  10  10  10  5  5  5  5  0  0  0  0  -5  -5  -5  -5  -10  -10 -10  -10 00  01  02 U.S.  03 Euro Zone  04 Japan  05  06 Mexico  07 Chile  08  00  01  02  U.S.  03  Euro Zone  04  Japan  05  06  Mexico  07  Chile  08  Source: Central Banks and Bloomberg  10  BIS Review 74/2008