As if inflation wasn't "mysterious" enough to the Fed already, today the New York Fed joined the Atlanta Fed first in releasing its own measure to track underlying inflation called, simply, the Underlying Inflation Gauge. What is notable is that this latest inflation tracker shows prices behaving quite differently from traditional indexes this year.
According to the UIG's August measure, broad inflation came in at a red hot 2.74%, the highest since November 2007, according to historical data from the Fed. That compares with just 1.9% annual inflation according to the Labor Department’s CPI and an even more paltry 1.4% as measured by the preferred PCE gauge of Fed policy makers, which matched the lowest since September 2016.
This is what the latest reading showed:
- The UIG estimated on the “full data set” increased from a revised 2.64% in July to 2.74% in August.
- The “prices-only” measure increased from a revised 2.09% in July to 2.17% in August.
- The August CPI showed a further pick up in inflation from June. In response to the firming of CPI inflation, both UIG measures displayed a rise in trend inflation.
- he UIG measures currently estimate trend CPI inflation to be in the 2.2% to 2.7% range, with both registering above the actual twelve-month change in the CPI.
Why the gap? According to Bloomberg, the full data UIG incorporates dozens of additional variables outside of prices, including the unemployment rate, stock prices, bond yields and purchasing managers’ indexes. Furthermore, if Dudley is right, and there is structural disinflation going on, then the UIG would be much higher using a ‘traditional’ supply curve. Here, as Citi cynically notes, "structural disinflation is far from permanent, as the Mayor of London’s latest regulatory action illustrated very clearly. Anti-trust or other regulatory measures can end the new supply paradigm at any time."
Additionally, a lot of the disinflation in the New Economy may have been a function of high G10 unemployment, and urbanization in China: both of which have now ended as drivers of disinflation.
While the second, “prices-only” version of the UIG is derived from CPI data, that measure still rose a solid 2.2% in August. The New York Fed says the UIG “has shown more accurate forecasts of inflation compared with core inflation measures,” and the two UIG measures indicate that “trend CPI inflation” is currently in a range of 2.2 percent to 2.7 percent.
Meanwhile, the annualized 1 month Atlanta Fed Sticky Price CPI surged to 3.1% in August.
Still, when one central bank now has no less than three different inflation metrics to contend with, and base its decisions on, all of which show vastly different numbers, we can see why Yellen would be "confused", and why as we said two weeks ago, what the Fed should be doing is figuring out why and how it is calculating inflation incorrectly before continuing to blow the world's biggest asset bubble.