New Indicator: Underlying Inflation Gauge
Economists at the NY Federal Reserve Bank introduced a new measure of trend inflation in September 2017, the Underlying Inflation Gauge (UIG), meant to complement the current standard measures. Investors and policymakers alike have an interest in the behavior of inflation over longer time periods.
The trend component of inflation is not an observed measure and a proxy measure is required to calculate it. To calculate trend inflation, transitory changes in inflation must be removed such as volatile components or specific items. Core CPI, which is the most widely used and accepted form of estimating trend inflation, only focuses on price components. The UIG derives trend inflation from a large set of data that extends beyond price variables. Additionally, it has shown higher forecast accuracy than traditional core inflation measures.
Here’s what the NY Fed says about the UIG:
“…the design of the UIG is based on the premise that movements in trend inflation are accompanied by related changes in the trend behavior of other economic and financial series. Consequently, we examine a large data set to identify the common component of other economic and financial series and then focus on the persistent part of the common component.”