Mark Mils and Peter Klenow, in a 2004 paper, “Some Evidence on the Importance of Sticky Prices,” in the Journal of Political Economy, made a study of how often prices change in the U.S. economy. What they found is that in the U.S. economy, the median time between time and price changes (excluding temporary price changes such as sales and specials) was 8 to 12 months. It is also the case that service prices change less often than goods prices, and prices of goods that use a high proportion of raw materials change more often, as do prices of unprocessed food items.

Suppose that there is a supply shock, such as the increase in oil and other energy prices that occurred after Hurricane Katrina. In less than a year, these prices fell from their high point in the fall of 2005, as Gulf Coast refineries were brought back online and much of the damage to Gulf oil and gas production was repaired. The price of oil did not fall all the way back to summer 2005 levels, but this was due to other factors such as cutbacks in production by OPEC and a continuation of rising demand for oil by China and India in 2006. Also, there was relatively little change in the U.S. rate of inflation in late 2005 and 2006. 

If Mils and Klenow’s work is correct, why didn’t the inflation rate increase in 2006 as a result of the Katrina supply shock?