Inflation Looks Poised to Bounce Back Big Time

(February 21, 2018 - by Jeanna Smialek)

If you’ve been waiting for the U.S. unemployment-inflation relationship to reassert itself, 2018 may be the year for you. 

Not only are recent inflation data showing signs of a pickup, but analysts say that price indexes that don’t usually move in response to the business cycle are poised for a snapback. Deutsche Bank’s note on that topic leads this week’s economic research wrap, which also looks at studies on the decline in the U.S. employment-to-population ratio, sunshine and the flu season, the tension between good employees and good managers, and the outlook for Asian economic growth. Check this column each Tuesday for the latest in economic research from around the world. 

The Price is Right

Acyclical Inflation: What Is Down Must Come Up?
Published Feb. 16
Available to Deutsche Bank subscribers

So-called acyclical inflation may be picking up at long last. As a refresher, acyclical prices don’t budge much as unemployment falls, and you can read more on what indexes qualify here. The measures have been low in recent years, holding down overall inflationary pressures and making it harder for the U.S. Federal Reserve to hit its 2 percent inflation goal. But we may be at an inflection point, Deutsche Bank economists write in a research note. A weaker dollar should help boost import price inflation, they write, and health care inflation has been showing a strong uptick. 

The analysts point out that unemployment needs to be very low – less than 4 percent in today’s economy – to boost inflation when acyclical inflation is depressed. That’s relevant, since joblessness is already down to 4.1 percent and prices have yet to pick up much. The analysts say that a 3.8 percent jobless rate is probably needed these days, supporting the idea that the Phillips Curve unemployment-price relationship is flatter than once thought – but not dead.