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.