Introduction to Inflation in an Era of Relative Price Shocks

Movements in commodity prices can have large effects on output and inflation. From both an academic and policy perspective, changes in commodity prices relative to the prices of services and manufactured goods pose a number of important questions. First, what are the fundamental processes or shocks that drive these changes and how persistent are they likely to be? Second, through what transmission mechanism do these shocks affect output and inflation and how does economic structure and the policy environment affect the transmission? And third, how should policy-makers respond to movements in relative prices?