Dealing with Inflation

I found this excellent article on how to deal with the rise in inflation by Frederic Mishkin several weeks ago through Greg Mankiw's blog and while the worsening financial crisis has shifted attention away from inflation worries I still think that it makes a very interesting point on how central banks should deal with the current spike in inflation:

It is certainly true that central banks should be worried about high headline inflation caused by high commodity prices. After all, households daily pay for energy and food items, and they are a big chunk of people's budgets. But central banks cannot control relative prices for food and energy. When a cold snap freezes the Florida orange crop or a tropical storm hits the gasoline refineries along the Gulf Coast, monetary policy cannot reverse the resulting spikes in prices for fresh orange juice or for gasoline at the pump that lead to high inflation in the short run. Particularly volatile items like food and energy, which are included in headline measures of inflation, are inherently noisy and often do not reflect changes in the underlying rate of inflation, the rate at which headline inflation is likely to settle and which monetary policy can affect.
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If the monetary authorities react to headline inflation numbers, they run the risk of making serious policy mistakes.
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Monetary policy should not overreact to headline inflation. It can do little about the first-round effects of a rise in energy prices, which include both its direct impact on the energy component of overall consumer prices, and the pass-through of higher energy costs into prices of non-energy goods and services. But the Fed does have to worry about possible second-round effects associated with changes in the underlying trend rate of inflation. Such second-round effects are likely to be quite limited only as long as the rise in the relative price of energy does not lead to a rise in long-run inflation expectations. Here there is good news as well. Inflation expectations have remained quite well grounded during this recent spike in energy and commodity prices.