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March 7, 2018
Inflation data over the past year – and especially over the past week – have highlighted a critical point. Fluctuations in inflation rates for items that are typically insensitive to the busi-ness cycle — which we refer to as acyclical, such as health care and apparel — can drive the overall inflation trajectory and lead to regime shifts in the market’s inflation narrative. The plunge in wireless telephone services prices last March, followed by a string of downside surprises to other acyclical items, spawned a narrative that structural disinflationary forces would prevent inflation from rising. In the same way, recent stronger inflation data led by acyclical items may have revived the narrative that the Phillips curve is, in fact, alive and well and that risks are tilted toward inflation overshooting the Fed’s target. [more]
PROD0000000000464240 1   |    March 7, 2018Thematic Research This is an excerpt of US Economic Perspectives , published on February 18, 2018. March 7, 2018 Acyclical inflation What is down must come up? Inflation data over the past year – and especially over the past week – have highlighted a critical point. Fluctuations in inflation rates for items that are typically insensitive to the busi-ness cycle — which we refer to as acyclical, such as health care and apparel — can drive the overall inflation trajectory and lead to regime shifts in the market’s inflation narrative. The plunge in wireless telephone services prices last March, followed by a string of downside surprises to other acyclical items, spawned a narrative that structural disinflationary forces would prevent inflation from rising. In the same way, recent stronger inflation data led by acyclical items may have revived the narrative that the Phillips curve is, in fact, alive and well and that risks are tilted toward inflation overshooting the Fed’s target. We take a closer look at the behavior of inflation for acyclical items over time. Our analysis has three primary conclusions. First, acyclical items are a key driver of the slope of the Phillips curve over time. The Phillips curve “works” during periods when inflation for acyclical components rises as the unemployment rate falls, and vice versa. Second, the unemployment rate must be significantly lower when acyclical inflation is low, as has recently been the case, for the Fed to hit its 2% target. Third, health care inflation and the dollar are two key drivers of acyclical inflation over time. Periods in which health care inflation is high and/or the dollar is weak, tend to be periods where the Phillips curve works. Although acyclical inflation has been low on average over the past several years, there is building evidence that it may be on the verge of rising more sustainably. First, the sharp depreciation in the trade-weighted dollar since its recent highs in early 2017 should help lift import price inflation and provide a tailwind to acyclical inflation. Second, recent data on health care inflation has shown a sharp uptick. If this trend is sustained, acyclical inflation will rise, helping to drive core inflation higher, eventually overshooting the Fed's target as our forecast implies. Authors www.dbresearch.com Matthew Luzzetti +1(212)250-6161 matthew.luzzetti@db.com Justin Weidner Laura Desplans Brett Ryan Deutsche Bank Research Acyclical inflation 2   |    March 7, 2018Thematic Research © Copyright 2018. Deutsche Bank AG, Deutsche Bank Research, 60262 Frankfurt am Main, Germany. All rights reserved. When quoting please cite “Deutsche Bank Research”. The above information does not constitute the provision of investment, legal or tax advice. Any views expressed reflect the current views of the author, which do not necessarily correspond to the opinions of Deutsche Bank AG or its affiliates. Opinions expressed may change without notice. Opinions expressed may differ from views set out in other documents, including research, published by Deutsche Bank. The above information is provided for informational purposes only and without any obligation, whether contractual or otherwise. No warranty or representation is made as to the correctness, completeness and accuracy of the information given or the assessments made. In Germany this information is approved and/or communicated by Deutsche Bank AG Frankfurt, licensed to carry on banking business and to provide financial services under the supervision of the European Central Bank (ECB) and the German Federal Financial Supervisory Authority (BaFin). In the United Kingdom this information is approved and/or communicated by Deutsche Bank AG, London Branch, a member of the London Stock Exchange, authorized by UK’s Prudential Regulation Authority (PRA) and subject to limited regulation by the UK’s Financial Conduct Authority (FCA) (under number 150018) and by the PRA. This information is distributed in Hong Kong by Deutsche Bank AG, Hong Kong Branch, in Korea by Deutsche Securities Korea Co. and in Singapore by Deutsche Bank AG, Singapore Branch. In Japan this information is approved and/or distributed by Deutsche Securities Inc. In Australia, retail clients should obtain a copy of a Product Disclosure Statement (PDS) relating to any financial product referred to in this report and consider the PDS before making any decision about whether to acquire the product.   Shifts in the behavior of acyclical components are a key driver of the Phillips curve relationship over the time
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