New Indicator: Underlying Inflation Gauge
Here is the latest from the NY Fed:
The UIG derived from the “full data set” increased from a currently estimated 3.15% in March to 3.20% in April.
The “prices-only” measure increased from 2.23% in March to 2.29% in April.
The twelve-month change in the April CPI was +2.5%, a 0.1 percentage point increase from the March reading.
The UIG measures currently estimate trend CPI inflation to be approximately in the 2.3% to 3.2% range, with the prices-only measure modestly below the actual twelve-month change in the CPI. As we have noted recently, the rise in the full-data-set UIG compared to the prices-only measure is being driven principally by survey measures of manufacturing and nonmanufacturing activity.
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.”