Acyclical Shocks, Not Wages, Are Keeping US Inflation Above 2% Target
The San Francisco Fed's decomposition of core PCE shows that acyclical components, those driven by industry-specific or structural factors rather than the broader business cycle, are primarily responsible for keeping inflation elevated.
Natixis economists Hodge and Aker cite this framework directly: cyclical components, which respond to monetary policy, are trending down, while acyclical components, sensitive to tariffs and energy shocks, are doing most of the lifting.
Hiking rates compresses cyclical price pressures. It does not address acyclical ones. If the SF Fed decomposition is right, additional tightening has limited marginal impact on the components currently holding inflation above target.
The San Francisco Fed's decomposition of core PCE shows that acyclical components, those driven by industry-specific or structural factors rather than the broader business cycle, are primarily responsible for keeping inflation elevated.
Natixis economists Hodge and Aker cite this framework directly: cyclical components, which respond to monetary policy, are trending down, while acyclical components, sensitive to tariffs and energy shocks, are doing most of the lifting.
Hiking rates compresses cyclical price pressures. It does not address acyclical ones. If the SF Fed decomposition is right, additional tightening has limited marginal impact on the components currently holding inflation above target.