The scare-mongers have been at it for years it seems, trying to gin up a reason for higher interest rates and fanning the fears of "runaway inflation." Here's just a taste — investment advice from the Wall Street Journal (you have the option not to click). A g-search produces similarly scary warnings.
The latest scare-warning is that the current spike in commodity prices is the precursor to an inflation-tsunami. Well, the Chicago Fed has done a study and the answer is ... uh, No. Paul Krugman reports:
The Chicago Fed has a new paper (pdf) showing that shocks to commodity prices do not, in fact, presage higher core inflation. ... Here’s the IMF index of commodity prices versus core inflation since 1993:
Seems pretty straight-forward to me. For the reason to use core inflation and not "headline inflation" as a guide for setting interest rate policy, see here. Yes, people do suffer when energy and food prices rise sharply. But if you raise rates on every headline inflation spike, you have to lower them on every drop. Look again at the chart above. Which line would you want your interest rate policy to look like?
For example, here's Eurozone inflation, core and headline, for 2005–2010 (Krugman again):
The U.S. chart is similar. In the above scenario, would you want interest rates sharply higher in 2008, then halved or quartered in 2010? Or something more gradual? GP
