According to the Federal Reserve’s Underlying Inflation Gauge, the 12-month inflation growth in December was at 2.98 percent. That’s the highest rate recorded in 136 months, or about 11 years. The last time the UIG measure was as high was in September 2006, when it was at 3 percent.
The Fed began publicly reporting on new measure in December of last year, and takes into account a broader measure of inflation than the more-often used CPI measure.
Not shockingly, the UIG shows a higher rate of inflation than the CPI, and also shows a different trend. the UIG has been increasing in recent years while consumer price trends have been falling.
In December, while the UIG was 2.98 percent, the CPI came in at a mere 2.1 percent, which is a four-month low.
As we reported earlier today, central banks continue to remain reticent as far as raising interest rate targets and scaling back QE. The excuse is often that the economy is not hitting the “two-percent target.” Two-percent, of course, indicates inflation levels that are “just right” according to the arbitrary goal set by central banks.
Politically speaking, it is also assumed that a two-percent inflation rate is palatable since it is though to offer a reasonable amount of price stability.
But what if inflation as experienced by real people — and as indicated by the broader UIG measure — is closer to three percent, and is more like the inflation rate encountered during the days of the super-heated housing bubble in 2006? That would seem to suggest more urgency in raising rates in order to put a lid on price inflation while lessen malinvestment.
According to the CPI, though, current price inflation is no where near where it was prior to the last financial crisis.
So according to the CPI at least, everything looks well under control. The UIG tells a different story, but that’s not used as the basis for monetary policy.
