The big economic debate of the moment is whether the Fed and its peers have made a terrible mistake by focusing on staving off financial crisis while more or less ignoring the rise of inflation. “Inflation is rising and it seems the world’s central banks have critically misjudged the situation,” says Wolfgang Munchau in the FT. I’ve heard even more apocalyptic views from some serious people in the last couple of weeks.

As it happens, I don’t agree. And I thought it’s worth spelling out why — especially because many if not most of the participants in this debate don’t explain their premises very clearly.

So: when 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, which explains how we can have what is often called an inflationary spiral, but would better be described as inflationary leapfrogging — a process in which inflation can feed on itself.

Imagine that there are two entrepreneurs, Harry and Louise, both of whom change prices only at fairly long intervals — say, once a year. Other things equal, Harry want 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, inflation can feed on itself: 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. It looks like this, with Harry in red and Louise in blue:

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. This makes Harry shave his price increases a bit, and then Louise does the same, and over time both start to notice that the other’s price increase keeps falling short of expectations, and eventually 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.

But how is this relevant to current events? Well, the problem of embedded inflation applies only to prices that are set at fairly long intervals — especially to wages, which are usually set only once a year. 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 that excludes food and energy: it’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.

In short, this doesn’t look at all like the 70s. Inflation is nasty, but it’s 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.