Reports of the Phillips curve's death are exaggerated, according to a new Cleveland Fed study
According to the Cleveland Fed’s latest economic commentary, Cyclical versus Acyclical Inflation: A Deeper Dive, reports of the Phillips curve’s death are exaggerated. Cleveland Fed researcher Saeed Zaman builds on recent research separating the components of overall inflation into cyclical and acyclical categories, but does so at a finer level of disaggregation than previous analyses to understand recent inflation developments in the two categories.
Zaman finds that the inflation rate among cyclically sensitive subcomponents—those which are relatively responsive to economic conditions and which comprise roughly 40 percent of overall core PCE inflation—has generally continued to firm in recent years. This firming is commensurate with a strengthening labor market that has returned the cyclical-category inflation rate to near pre-Great Recession levels. By contrast, the inflation rate among the acyclical subcomponents remains subdued.
“The analysis shows the Phillips curve relationship continues to be alive and well for categories of goods and services that have historically been responsive to overall labor market conditions,” Zaman says. “While the results based on higher-level aggregates point to a recent step down in cyclically sensitive inflation, I find that a measure of cyclically sensitive inflation based on highly disaggregated data has continued on a firming trend in recent years in line with a strengthening labor market.”
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, Zaman finds.