Finally, An Honest Inflation Index - Guess What It Shows

Authored by John Rubino via,

Central bankers keep lamenting the fact that record low interest rates and record high currency creation haven’t generated enough inflation (because remember, for these guys inflation is a good thing rather than a dangerous disease).

To which the sound money community keeps responding, “You’re looking in the wrong place! Include the prices of stocks, bonds and real estate in your models and you’ll see that inflation is high and rising.”

Well it appears that someone at the Fed has finally decided to see what would happen if the CPI included those assets, and surprise! the result is inflation of 3%, or half again as high as the Fed’s target rate.

New York Fed Inflation Gauge is Bad News for Bulls

(Bloomberg) – More than 20 years ago, former Fed Chairman Alan Greenspan asked an important question “what prices are important for the conduct of monetary policy?” The query was directly related to asset prices and whether their stability was essential for economic stability and good performance. No one has ever offered a coherent answer even though the recessions of 2001 and 2008-2009 were primarily due to a sharp correction in asset prices.


A new underlying inflation gauge, or UIG, created by the staff of the New York Fed may finally provide the answer. Its broad-based measure of inflation includes consumer and producer prices, commodity prices and real and financial asset prices. The New York Fed staff concluded that the new inflation gauge detects cyclical turning points in underlying inflation and has a better track record than the consumer price series.


The latest reading shows inflation of almost 3 percent for the past 12 months, compared with 1.8 percent for the consumer price index and 1.8 percent for core consumer prices, which exclude food and energy. Since the broad-based UIG is advancing 100 basis points above CPI, it indicates that asset prices are large, persistent and reflect too easy monetary policy.



The UIG carries three important messages to policy makers: the obsessive fears of economy-wide inflation being too low is misguided; monetary stimulus in recent years was not needed; and, the path to normalizing official rates is too slow and the intended level is too low.


Harvard University professor Martin Feldstein stated in a recent Wall Street Journal commentary that “The combination of overpriced real estate and equities has left financial sector fragile and has put the entire economy at risk.” If policy makers do not heed his advice odds of another boom and bust asset cycle will be high — and this time they will not have the defense mechanisms they had after the equity and housing bubbles burst.

To summarize, a true measure of inflation – one that is highly correlated with the business cycle – is not only above the Fed’s target but accelerating.

Note on the above chart that both times this happened in the past a recession and bear market followed shortly.

The really frustrating part of this story is that had central banks viewed stocks, bonds and real estate as part of the “cost of living” all along, the past three decades’ booms and busts might have been avoided because monetary policy would have tightened several years earlier, moderating each cycle’s volatility.

But it’s too late to moderate anything this time around. Asset prices have been allowed to soar to levels that put huge air pockets under them in the next downturn. Here’s a chart that illustrates both the repeating nature of today’s bubble and its immensity.

In other words, it is different this time - it’s much worse.


YUNOSELL Thu, 12/07/2017 - 08:17 Permalink

If only Venezuela switched to the FED's methodology for calculating inflation, it would discover it actually needed to print more money.

eclectic syncretist luckylongshot Thu, 12/07/2017 - 10:08 Permalink

Well said.“In progressive societies the concentration[of wealth] may reach a point where the strength of number in the many poor rivals the strength of ability in the few rich; then the unstable equilibrium generates a critical situation, which history has diversely met by legislation redistributing wealth or by revolution distributing poverty.” Will DurantThe Lessons of HistoryIt seems clear at this time our legislators are still intent on concentrating wealth into the hands of a few.

In reply to by luckylongshot

Grandad Grumps Thu, 12/07/2017 - 08:19 Permalink

Rather than look at change (as reflected by inflation rate), one should look at costs and see that the costs have been increasing through it all.

Even during the 2009 recession we still had inflation.

People do not need or want inflation. Only banks need inflation. Banks need people to be able to pay off the debt plus interest while still maintaining full control over people and businesses.

CRM114 Thu, 12/07/2017 - 08:27 Permalink

Still BS. Real inflation for Joe Average has been and is way higher than this.Now recalculate wages, GDP, productivity, etc, and the US has never been out of recession since 2008.Actually, I would put money on this supposedly accurate inflation measure being carefully fudged to NOT show that' i.e. the US is just not quite in recession. In other words, this is the biggest lie they think they can now get away with politically. 

CRM114 JohnGaltUk Thu, 12/07/2017 - 08:59 Permalink

If one can be bothered to trawl through the methodology on CPI, e.g.'s quite clear that the majority of 'fixes' being employed by retailers are not going to be picked up by the Stats people.Firstly, Shrinkflation is not going to show up unless the stats wonks actually go out to the shops and check the shelves, and they haven't the manpower to do that. The pricing / sale variations that the retailers do to disguise the introduction of a smaller packet follow a pretty standard pattern which is not going to be picked up by either the average consumer, or the BLS, as it's designed specifically for the purpose of disguise.Secondly, the reduction in quality that isn't explicit doesn't show up, e.g. retailer keeps the same part number, maybe even the same outer case, but for example the metal gears inside the product are now plastic, so the lifespan is halved. In some cases, I'm pretty sure even the retailer doesn't know, as the reduction in quality has happened at the manufacturer (probably in response to a price reduction demand by a big retailer's buyer). I have found this to be true for at least 3 products I took back to the retailer - same part number but reduced quality inside the box from a couple of years previously - the manager had no idea this had happened (except he was getting a lot more returned).Thirdly, the amount of purchasing that happens in sales vs normal retail pricing doesn't show up.In my experience, all the above frauds are quite widespread now.In short, the actual methodology of the CPI means it isn't worth the paper it's written on, because the whole retail system of reducing quantity and quality, whilst primarily aimed at conning the consumer, necessarily cons the CPI statisticians, because they are even less discerning.  

In reply to by JohnGaltUk

Stuck on Zero CRM114 Thu, 12/07/2017 - 09:54 Permalink

Not taken into account in inflation numbers is improvement in productivity. Technology has enabled factories to churn out products at lower and lower cost. Robotics has improved production enormously. We should all be enjoying deflation in the cost of everything but no such hope. All that increase in productivity is being consumed by the government as greater and greater waste, fraud, and transfer of wealth to the rich.

In reply to by CRM114

CRM114 Stuck on Zero Thu, 12/07/2017 - 10:16 Permalink

Productivity numbers are BS also.Whilst robots allow lower manufacturing wage costs, of at least equal effect is the loss of real productivity in byzantine regulations and policies, and the manpower needed to service them. It also needs to be remembered that, because of offshoring and other transfer of labour to the less productive (e.g. Indian 'engineers' who got their quals from ebay and can't actually fix or design anything properly), the components being churned out by the robots are less reliable and effective than previously.Think about it, a crap device that breaks more often, gets serviced more often and replaced more often shows up in the data as both increased productivity and increased GDP, even though it's worse.Government and industry hate the idea of an everlasting anything. Ways are found to outlaw things that do last a long time.  Which is partly why GDP is BS too.EVERY STAT IS BS.There isn't a stat left that actually measures what it purports to, because the measures are chosen to show what makes the chooser look good, not reality. And as the incompetence level increases, everyone in the system now has an incentive to keep the genuinely productive out, because it makes them look bad. Vicious spiral. 

In reply to by Stuck on Zero

OverTheHedge JohnGaltUk Thu, 12/07/2017 - 11:44 Permalink

I discovered recently that milk in the US may contain other ingredients - i.e. fresh milk may be reconstituted, in part or entirely, and have other additives. I've never had any American milk, so I wouldn't like to make a sweeping statement, but it is entirely possible that your "Farm Fresh" milk may not be as fresh as you think. Or entirely milk. I do know that there are regular checks to ensure that the lamount of pus does not exceed certain levels.Yup, I said PUS. Didn't leave out the "sy".

In reply to by JohnGaltUk

SDShack CRM114 Thu, 12/07/2017 - 13:32 Permalink

The USSA has been in a depression since yr 2000 and the DotCom bust, spawned by Globalization and Free Trade. It's been one giant world wide bubble over and over since then. It's all a giant Ponzi scheme by the elites to systematically destroy the world middle class and create a New Feudal World Order.

In reply to by CRM114

Iconoclast421 Thu, 12/07/2017 - 08:23 Permalink

This is what they will switch to once it turns downward like in 2008. Then they will say "see, we need to print print print moar because this index is at -0.6".

MusicIsYou Thu, 12/07/2017 - 08:23 Permalink

There doesn't have to be inflation because the Fed can just erase money with a compiter keyboard. It's not like in the old days when only cash was in circulation. Today greater than 95% of dollars are electronic so it can just be deleted to control inflation. That also means elites can just give themselves as many raises as they want while everybody else has to labor by the hour.

Let it Go Thu, 12/07/2017 - 08:28 Permalink

The ECB and other central banks often claim deflation drives or allows their QE policy to remain and is central to their ability to stimulate. The moment inflation begins to take root or becomes apparent much of their flexibility in policy is lost. The 2% inflation target central banks have deemed optimum is not valid.In the past, I have put forth the idea that inflation could rule the day even if central banks are unable to keep the wheels on the bus and the economy collapses. This powerful force also known as stagflation can devastate those improperly invested. The article below explores the basis of this theory. http:/The Inflation Or Deflation Debate Continues.html

MusicIsYou Thu, 12/07/2017 - 08:31 Permalink

All this inflation and deflation talk, graphs and charts are total B.S. The Fed can print as much money as they want because their electrons and then delete electronic digits as necessary. Oh and I'm sure Yellen just plops $billions in all her friend's bank accounts as she sees fit since the Fed can print as much as they want.

Seasmoke Thu, 12/07/2017 - 08:37 Permalink

There is No inflation. My 52 ounce orange juice is the same price as my 64 ounces was.

Thank You Federal Reserve. What would we ever do without you.

PitBullsRule Thu, 12/07/2017 - 08:38 Permalink

Did you include Bitcoin in your index?  Why not?  There's only so many Bitcoins, and everybody seems to want them, so why shouldn't they indicate inflation?AHA!Gotcha!

east of eden Thu, 12/07/2017 - 09:01 Permalink

What's remarkable to me about this graph is not only the delta between real gdp and household wealth, but if you look at the second graph, and calculate the rate of increase since 1992, it is telling us that there has been an annual average increase in the rate of GDP growth of 7% annual, and of course, nothing like that has occured.So what is the real increasre in gdp, after inflation. That should be the data line, and it's a hell of a lot lower than 7%, so, the fall is going to be much more dramatic than even this chart suggests.Just looked it up and the 'real' gdp increase average per annum since 1992 has been 3.15% per year. Meaning that the terminal point on the gdp line on graph 2 should end at 178,000.00 per family of real wealth in 2017, not 410,000.00. That is more than 57% below the current 'at market' estimate of wealth.So when, not if, this thing reverts to the mean, you are going to find roughly 8 Trillion in household wealth vanish, with a commensurate call for more securities (real tangile securities like property or land) to back up existing leverage. Securities that don't exist, which means a dramatic spike in interest rates at exactly the wrong time, exacerbating the situation even further. It would probably mean another round of seeing hundreds of thousands of peole loose their jobs, their principal residencies, their families, everything. It could be the biggest blood bath the world has ever seen.

CO2isLife Thu, 12/07/2017 - 08:55 Permalink

Why use artificial metrics for inflation? The bond markets discount inflation in their interest rates. Either the entire global bond market is wrong and these inflation metrics are right, or vice versa. I bet the people with skin in the game, the bond investors, know the truth.

herkomilchen CO2isLife Thu, 12/07/2017 - 09:52 Permalink

The inflation rate is backward looking.  Bond yields are forward looking.The Fed is distorting bond market prices by printing money from thin air in unlimited quantity to buy bonds in unlimited quantity to get yields to their target rates.   Traders are (wisely) trading around that.  Traders know they can't fight a printing press.Traders are not trading bonds according to expected inflation-adjusted money productivity rates.  As they would in a free market.  Plus many traders buy into the Fed's Keynesian claim future productivity gains will counteract inflation down the road.Only later on when traders realize A) The Fed is wrong about productivity gains and B) The Fed can't/won't continue to print money to bid up bond prices will traders plow into the market selling bonds, and raising yields to reflect actual inflation expectations.

In reply to by CO2isLife

silverer Thu, 12/07/2017 - 08:57 Permalink

Here's one index of inflation that's much better than what is pumped at the sheeple. Because it's what the sheeple have to live with everyday:

The way they arrive at the numbers make a whole lot more sense than what the government does. Because the government stopped making sense a long time ago.

bottom_line Thu, 12/07/2017 - 09:27 Permalink

All inflation stats are BS because none of them incorporate the truth of product size reduction.  Prices don't rise, products just get smaller.  The only thing they can't muck with is staples like milk, eggs and butter so those just have to suffer or get subsidized.

GeezerGeek bottom_line Thu, 12/07/2017 - 12:07 Permalink

I can guarantee you that the price of Monster energy drinks has risen significantly in the last few months. That isn't the only thing that's gone up. So has the price of beef. And peanut butter and corn muffins.Over the longer term, my 1974 Dodge Charger cost roughly one dollar per pound, and that was a mid-sized car. Compare that behemoth with what is now considered a mid-sized car and you will see extreme shrinkage in size and extreme increase in prices. [And yes, extreme increases in quality.]We certainly are lucky to have a central bank that keeps an eye on the stable value of the currency. It's like watching to see if everything gets flushed down the toilet.

In reply to by bottom_line