The shares of firm costs accounted for by energy and commodities are no large and, in fact, have fallen over time. Moreover, at least in the case of oil, price increases tend to slow the economy even without any policy rate increases. Of course, if commodity and energy prices were to lead to a general expectation of a broader increase in inflation,more substantial policy rate increases would be justified. But assuming there is a generally high degree of centralbank credibility, there is no reason for such expectations to develop—in fact, in the post-Volcker period, there have been no signs that they typically do.The most interesting graph or below. The letter looks at the impact of a commodity price shock(4 graphs on top) and oil price shock(4 graphs at the bottom) on the federal fund rate and, more importantly, the core prices. They compare the responses in the pre and post-Volcker era. The difference is amazing: core inflation does not respond at all in the post-Volcker era. The main driver of the weak relation between headline inflation and core inflation could thus be the credibility of the Central Bank. The channel through which this would play is not clear to me, and the letter is quite vague on it to, in my opinion. From the graphs, what we see is that in the post-Volcker era, a shock to energy or food prices was not followed by monetary tightening, and that even without monetary tightening, core inflation was stable.
The last disclaimer is that, as I said earlier(I think), this is not completely informative for the European case because of, for instance, the fact that oil is priced in dollar. In any case, the short letter is worth reading.