Paul Krugman looks at this graph:
Embedded vs. non-embedded inflation: [W]hen is it appropriate to get very concerned about inflation, and when is it OK to assume that a rise in prices is a temporary shock that will pass? The answer is that inflation becomes a big problem if it becomes “embedded” in the economy, which makes it hard to restore more or less stable prices. But how does inflation get embedded?
Well, I’m basically a believer in a “staggered price-setting” story... inflationary leapfrogging.... Harry wants his average price over the next year to be about the same as Louise’s; Louise wants her average price to be about the same as Harry’s. But their price setting takes place on different dates. (This is a metaphor for the real economy, in which people setting prices have to think about the prices of many competitors and suppliers that will prevail until they revise the price again.) In this situation... Harry raises his price above Louise’s, because he expects her to raise her price in the future, and she does the same thing when it’s her turn.... Once expectations of inflation get embedded like this, it’s hard to get price stability back. In practice, what happens is that central banks deliberately cause a recession... inflationary momentum gets wrung out of the system — but at a high cost. In the 1980s, it took double-digit unemployment to get rid of the embedded inflation from the 1970s.
ut how is this relevant to current events? Well, the problem of embedded inflation applies only to prices that are set at fairly long intervals.... There’s no comparable problem with commodities like wheat or oil, where the price changes minute by minute, and goes down as easily as it goes up. It may sound perverse, but embedded, hard-to-reverse inflation is only a problem for parts of the economy with relatively sticky prices. So to get a sense of whether embedded inflation is becoming a problem, you have to purge the highly volatile prices — basically, commodities — from the picture. That’s why the Fed focuses on “core” inflation.... [I]t’s not a nefarious scheme to ignore the real hardships people face, it’s an attempt to figure out if inflation is getting built into the system.
In the 70s, it was: core inflation quickly shot up after the energy and food price spikes. But this time that’s not happening at all: the rise in inflation is all commodities, with no sign that expectations of inflation are getting embedded in price-setting through the rest of the economy.... Inflation is... not getting a grip in a way that will cause it to persist if and when oil and food top out. And it would be a big mistake if the Fed lets fear of inflation distract it from the urgent task of heading off a financial meltdown.