The Federal Reserve Bank of San Francisco provides key data on the breakdown of personal consumption expenditure (PCE) inflation into cyclical and acyclical components. The cyclical components are items of Personal Consumer Expenditure, the inflation preferred by the Federal Reserve, whose prices are more sensitive to general economic conditions such as housing, recreational and restaurant services. Cyclical components account for approximately 40% of US PCE. The acyclic components, however, represent approximately 60% of the PCE and are more sensitive to sector-specific factors. They include items such as healthcare, financial services and clothing.
To evaluate whether a PCE component is cyclical or acyclical, the Mahedy-Shapiro method is used which estimates a Phillips curve model that relates the changes in prices of a category with the unemployment gap, i.e. the gap between the unemployment rate country and its natural or long-term unemployment rate.
If the relationship between the unemployment gap and the inflation rate of the examined series is negative and statistically significant, the category is considered cyclical. Otherwise, it is considered acyclic.
The chart shows cyclical PCE core inflation (black line) and acyclical PCE core inflation (blue line). Acyclical inflation stands at 1.50% and has been below the hypothetical objective of 2% for over 10 months, while the cyclical component is still too high and is proving to be particularly sticky: in fact, it stands at 4 ,90%.
The road is still long and tortuous and Powell will soon have to resign himself to inflation higher than the classic target of 2% and for a period of time that is difficult to define. The only concern is how to make it accepted by the financial community now accustomed to a paradigm that probably no longer exists.
