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