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- Understanding The Role Of Inflation In The Business Cycle
Understanding The Role Of Inflation In The Business Cycle
The Macro Institute's Weekly Economic Primer
The Macro Institute
January 20, 2026
In partnership with
Don’t have time to watch the whole video? Here’s 5 Key Takeaways:
🔹 Investors Were Unfamiliar With Inflation: The spike in inflation following Covid, and its general stickiness since, has held massive mindshare amongst investors. This is because for the last 40 years inflation has been a nonevent, so investors were largely untrained in how to handle an inflationary backdrop.
🔹 There Are Many Different Ways To Measure Inflation: CPI, PPI, PCE, and Prices Paid are all popular ways to measure inflation. Each of these metrics offer a unique perspective into price changes. Most inflation metrics also offer a Core series, which removes food and energy prices from the calculation.
🔹 Energy Packs A Big Punch In Inflation Metrics: Despite only making up 6% of the CPI basket, energy’s volatility makes it the main driver of trends in the index. This makes Headline CPI incredibly sensitive to changes in oil prices.
🔹 Inflation Has A Big Influence On Economic Growth: A rise in commodity prices, mainly via its impact on the consumer, eventually becomes a headwind for the economy. In due time, a slowdown in economic prospects will ensue and result in lower commodity prices, setting the stage for the next recovery.
🔹 Inflation Is Half Of The Fed’s Mandate: The Fed uses rate hikes to control elevated inflation or mitigate inflation risks. This helps to explain the tight relationship between the fed funds rate and CPI going back 50 years.
Miss our last few videos? No worries. Check them out below 👇
1) Should America Rebuild Its Manufacturing Base?
2) Everything You Need To Know About PMIs
3) Explaining Our K-Shaped Economy
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Macro Data Center
The Macro Week Ahead
📆 Last Week’s Data Key Takeaways
🔹 NFIB Optimism Rose & Uncertainty Fell: The NFIB Small Business Optimism Index ticked up to 99.5 in December (+0.5), staying above its long-run average. The Uncertainty component dropped 7 points to 84 (lowest since June 2024).
🔹 CPI Held Relatively Steady: Headline CPI rose +0.3% m/m in December and held at +2.7% y/y. Core CPI rose +0.2% m/m and +2.6% y/y. Questions remain about the quality of inflation data following the government shutdown.
🔹 “Low Fire, Low Hire” Job Market Continues: Initial claims fell to 198k, while continuing claims dipped to 1.884M. As a whole, layoffs remain contained even as hiring momentum has softened.
🔹 Homebuilders Are Still Pessimistic: The NAHB Housing Market Index fell to 37 in January (21st straight month below 50). Buyer traffic remained very weak at 23, reinforcing that affordability is still weighing on housing activity.
🔹 Federal Budget Deficit Jumped: The U.S. Treasury posted a $145B December deficit, driven by heavy outlays. Fiscal impulse and higher rates continue to make “solving the fiscal issue” incredibly difficult.
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