According to the Federal Reserve’s Underlying Inflation Gauge, the 12-month inflation growth in January 2019 was at 2.9 percent. That’s a 12-month low, and reflects the anemic economic growth the Federal Reserve has recently identified as a reason to slow down or stop the earlier-stated plans to raise the target interest rate and sell-off the Fed’s 4-trillion-dollar portfolio.
The Fed began publicly reporting on new measure in December of 2017, and takes into account a broader measure of inflation than the more-often used CPI measure.
Not shockingly, the UIG has shown a higher rate of inflation than the CPI, most of the time in recent years. Moreover, this gap between UIG and CPI has been generally higher in recent years.
In January, the UIG was 2.9 percent, the CPI growth rate was 1.6 percent. The gap was 1.4 percent, which was the largest gap in 39 months.
In other words, price inflation in both the UIG measure and the CPI have slowed. But it’s slowed more in the CPI than in the UIG measure. Not surprisingly, the FED concludes that inflation is not problem at all, while a broader look at the economy shows considerably more price inflation.
The use of consumer prices only in the CPI has long been a problem, in that the cost of living and planning for the future does not involve only the basket of goods used in the CPI calculations. A wide variety of assets affect the American economy as well.
As explained by the New York Fed’s summary of the UIG measure:
We use data from the following two broad categories: (1) consumer, producer, and import prices for goods and services and (2) nonprice variables such as labor market measures, money aggregates, producer surveys, and financial variables (short- and long-term government interest rates, corporate and high-yield bonds, consumer credit volumes and real estate loans, stocks, and commodity prices).
But don’t expect the Fed to abandon its fondness for the CPI and the arbitrary “2-percent inflation” goal any time soon.
