Cyclical versus Acyclical Inflation: A Deeper Dive

Abstract

This Commentary builds on recent research separating the components of overall inflation into cyclical and acyclical categories, but it does so at a finer level of disaggregation than previous analyses to understand recent inflation developments in the two categories. The inflation rate among cyclically sensitive subcomponents, which comprise roughly 40 percent of overall core PCE inflation, has generally continued to firm in recent years in line with a strengthening labor market and has returned to near pre-Great Recession levels. By contrast, the inflation rate among the acyclical subcomponents remains subdued. A modest firming in acyclical core PCE inflation to a more normal level, combined with ongoing strength in the labor market, would be enough to return core PCE inflation to 2 percent within approximately one year.

Is It Time to Reassess the Focal Role of Core PCE Inflation?

“…Could they replace 27 Earlier studies include Hubrich (2005), Peach, Rich, andLinder (2013). The Federal Reserve Bank of San Francisco has now incorporated the suggestions of Zaman (2019) and uses finer level detail in its routine reporting of cyclical and acyclical indicators. 28 Ashley and Verbrugge ( 2020) further demonstrate that their model generates an accurate conditional recursive forecast of trimmed mean PCE inflation dynamics over the Great Recession, and that the Phillips curve has not weakened at all.…”

“…(The Federal Reserve Bank of San Francisco publishes a cyclical core PCE inflation series. For related research, seeShapiro 2018, Stock and Watson 2019, Tallman and Zaman 2017, and Zaman 2019 ). Furthermore, asBall and Mazumder (2019) and demonstrate, both median PCE inflation and trimmed mean PCE inflation are well-explained using a Phillips curve relationship.28 Finally, as Dolmas and Koenig (2019) note, both trimmed mean inflation and median inflation give a more prominent role to "sticky" prices.29…”

Late Payment Fees and Nonpayment in Rental Markets, and Implications for Inflation Measurement: Theoretical Considerations and Evidence

“…Rent inflation is notoriously sensitive to unemployment fluctuations (see, e.g., Zaman (2019) and Stock and Watson (2020)). The $0 treatment of nonpayment could be a major channel of this sensitivity.…”

Inflation Dynamics and Forecast: Frequency Matters

“…4 Rather than decomposing the aggregate time series into frequencies, a recent alternative strategy involves splitting the price index into its components and empirically identifying the specic price categories sensitive to the degree of resource utilization. This cyclically sensitive ination is then used in a Phillips curve framework to analyze ination dynamics and forecast ination (see Zaman, 2019 andWatson, 2020). 9…”