The former chief economist of Goldman Sachs, Gavyn Davies, comments on his blog over at the FT:
"Here is the problem. There is a very big difference between a self-reversing up-and-down cycle in the commodity markets, and a longer term upward trend in commodity prices relative to the prices of goods and services produced in the developed economies. Because commodity prices are determined in competitive markets which need to clear at any point in time, they tend to fluctuate much more over short periods than the “sticky” prices and wages which exist in developed economies. If they are simply fluctuating around a constant or slowly rising trend, then they will quickly self-correct and the central bank should stay focused on the core inflation rate which is set in the rest of the economy.
But what if commodity prices are instead embarked on a long term uptrend against the prices of goods and services in the developed economies, driven by the rapid growth in the emerging economies? In that case, the commodity price shock would have a permanent effect on input prices in the developed economies, and it would not be appropriate for the central banks to ignore this shock. In fact, if they ignored it, they would simply be accommodating a permanent inflation shock to the system, which is what they did in the inflationary 1970s."
