Tags: energy | inflation

So-called headline inflation has soared as food and energy prices rose, leading to widespread concern that core inflation will head upward in reaction. A new Federal Reserve paper shows that is not likely to happen.

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Since the early 1990s, headline inflation has tended to converge toward core inflation, according to a new paper published by the Federal Reserve Bank of San Francisco. Core inflation, which measures prices of goods excluding volatile food and energy costs, has remained stable.

“If core remains low and stable despite large swings in food and energy prices, then headline inflation is likely to converge towards core over time as the effects of food and energy prices wane,” the study says. “Core can be destabilized if energy price increases are passed through to core prices or if inflation expectations are unanchored.”

The authors expect core inflation to remain low as pass-through from energy and other commodity prices to consumers is likely to be limited, and because investors’ inflation expectations are not high relative to economic conditions.

The authors add that continued commodity price increase could cause inflation expectations to rise, but add there is little evidence that will occur.