Fed's Underlying Inflation Gauge Warns Of Imminent Inflation Surge

As if inflation wasn't "mysterious" enough to the Fed already, recently the New York Fed joined the Atlanta Fed 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 3.27%, the highest since September 2005. That compares with just 2.8% annual inflation according to the Labor Department’s CPI and an even more modest 2.0% as measured by the preferred PCE gauge of Fed policy makers.

Why the gap? Because 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 noted recently, "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. 

But what is most troubling is that when one overlays the Underlying Inflation Gauge with core CPI, with a 15 month lead for the former, what emerges is the following troubling chart: it shows that all else equal, core CPI is set to spike in the coming months, and from its current level, is set to rise as high as 2.8%, matching the highest print since 2006 when the Fed Funds rate was around 5%, and a level which not even the Fed's latest "symmetric" mandate would be able to ignore, forcing Jay Powell to tighten even more aggressively over the coming year.



Wait What Yellow_Snow Mon, 07/09/2018 - 16:47 Permalink

One of the important things to note about CPI is that it is calculated using 2 year old data. It's why the regression estimate fails to capture shocks like oil price spikes, tariffs, and changes in monetary policy; they won't be reflected in the slope of the curve until 2019 and 2020. Which is to say, inflation will only continue higher from here.

Hedge accordingly.


In reply to by Yellow_Snow

Quantify BankSurfyMan Mon, 07/09/2018 - 14:15 Permalink

Always has been.

The first gold coins appeared around 560 B.C.  Over time it became a practice to store larger amounts of gold in warehouses.  Paper receipts were issued certifying that the gold was on deposit.  These receipts were negotiable instruments of trade and commerce which could be signed over to others.  They were not actual currency but are a presumed forerunner to our modern checking system.

In reply to by BankSurfyMan

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I Am Jack's Ma… boostedhorse Mon, 07/09/2018 - 14:03 Permalink

pulling the rug out from underneath the Donald’s feet...

What a wonderful way to get the West’s political superstructure, under the thumb of Anglo-Zionist bankers, to commit to a Third Great Slaughter of Europeans.

Need to kill off the Christian natives to make room for the New Europeans, after all.






In reply to by boostedhorse

karenm seisen Mon, 07/09/2018 - 14:13 Permalink

ie; FED is about to pull a shock rate hike to "control inflation"


Funny, while they were printing 80 billion a month there was no inflation but now that they've stopped suddenly we have inflation.


All bullshit folks, all a bullshit narrative to collapse the economy while people think it was an "unintended consequence."

In reply to by seisen

mark1955 Consuelo Mon, 07/09/2018 - 14:20 Permalink

Off-Topic...Friday the 13th ALERT!!!


False Flag Attacks for this Friday the 13th Warning!


Possible False Flags scenarios for this Friday:


1. FBI Staged Mass "Shootings" to Try and get more Gun Control. ( LAX TSA Check point Staged "Shooting" was on: Friday the 13th, 2013 and Arapahoe Colorado Staged "Shooting, was on December the 13th 2013! )


2. Possible STAGED Naval incident ( Think Tonkin Gulf ) between the United States Navy versus: China, North Korea and Iran, that might possibly include the STAGED sinking of a US Navy  vessel ( Possibly a submarine ) by the Chinese/North Koreans, to Try and get the American people on board World War Three!


 3. US Military attack against Syrian Military, after STAGED False Flag chemical attack against Syrian people, blamed Falsely on the President Assad and the Syrian military. ( Trump attacked the Syrian military on Friday April 13th 2018 ).



      Please Call out any and all "Incidents" for the STAGED Farces that they are and DEMAND HD Video Proof!





In reply to by Consuelo

JGC Mon, 07/09/2018 - 14:07 Permalink

CPI and PCE exclude asset prices---and to make matters more misleading both measures use artificial prices for owners housing costs. The NY Fed Index gets closer to actual inflation----yet policymakers are setting rate decisions on PCE and PCE core. Business cycles don't end with a lot of cyclical inflation (that has been removed from the measurement)---asset inflation is now the achilles heel of business cycles---and those prices tend to fall when expectations of future earnings and market returns become excessive---are we there yet?

Consuelo Mon, 07/09/2018 - 14:11 Permalink

'Inflation' has been in place - writ large, since 2008.   The Effects of inflation have also been there - just not yet writ-large, but that may be about to change.