Headline or core? Old problem, new dilemmas (Q4 2006)

Our feature article revisits the old problem of whether central banks should focus on the headline inflation rate, or the core. (See pages 3-6.) The sharp rise in commodity prices over the last few years has created a succession of dilemmas. Until very recently the problem was the divergence between rising headline inflation and relatively low core inflation. Now, however, the dilemma appears to have turned on its head: what should central banks do if headline inflation subsequently falls at the same time as core inflation picks up?