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New York Fed Concludes Underlying Inflation Is Only 4.6%

With the CPI a hot 7.5%, the Federal Reserve Bank of New York (FRBNY) offers another alternate measure to laugh at.
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Underling Inflation Gauge (UIG) data from FRBNY, chart by Mish

Underling Inflation Gauge (UIG) data from FRBNY, chart by Mish

For January 2022, the FRBNY Underlying Inflation Gauge (UIG) is 4.6%. 

Key Ideas 

  • The UIG "full data set" measure for January is currently estimated at 4.6%, a 0.1 percentage point increase from the previous month.
  • The "prices-only" measure for January is currently estimated at 5.2%, a 0.3 percentage point increase from the previous month.
  • The twelve-month change in the January CPI was +7.5%, a 0.5 percentage point increase from the previous month. 
  • For January 2022, trend CPI inflation is estimated to be in the 4.6% to 5.2% range, a wider range than in December, with its lower bound 0.1 percentage point higher.
  • The “prices-only” underlying inflation gauge (UIG) is derived from a large number of disaggregated price series in the consumer price index (CPI), while the “full data set” measure incorporates additional macroeconomic and financial variables. 

UIG Explanation     

The FRBNY offers thus Explanation of Underlying Inflation.

UIG Definition from the FRBNY 

UIG Definition from the FRBNY 

 If you seek an explanation you can understand, you are mostly out of luck.

Here is a paragraph in English that one can understand,

We use two data sets from the following broad categories: (i) goods and services prices (CPI, PPI); (ii) labor market, money, 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, commodity prices).  

Amusingly, the FRBNY takes into consideration government interest rates, real estate loans, and the volume of consumer credit, but no direct measure of housing prices nor any measure of stock market bubbles. 

The article repeats nonsense about "well anchored inflation expectations".

One of the inputs to UIG is the even more preposterous Trimmed Mean Inflation measure from the Dallas Fed. 

What is Trimmed Mean PCE?

Fred, the St. Louis Fed website offers this Explanation of Trimmed Mean PCE.

The Trimmed Mean PCE inflation rate produced by the Federal Reserve Bank of Dallas is an alternative measure of core inflation in the price index for personal consumption expenditures (PCE). The data series is calculated by the Dallas Fed, using data from the Bureau of Economic Analysis (BEA). Calculating the trimmed mean PCE inflation rate for a given month involves looking at the price changes for each of the individual components of personal consumption expenditures. The individual price changes are sorted in ascending order from “fell the most” to “rose the most,” and a certain fraction of the most extreme observations at both ends of the spectrum are thrown out or trimmed. The inflation rate is then calculated as a weighted average of the remaining components. The trimmed mean inflation rate is a proxy for true core PCE inflation rate. The resulting inflation measure has been shown to outperform the more conventional “excluding food and energy” measure as a gauge of core inflation.

On January 4, 2022, I noted Trimmed Mean Inflation Is the Ultimate Absurdity in Inflation Measures

Measure Comparison

  • Essentially the Dallas Fed says lets throw out the top and bottom items of the PCE and average the rest.
  • The PCE stands for Personal Consumption indicators and is the Fed's preferred measure of inflation.
  • PCE differs from the CPI in that it counts expenses paid on behalf of consumers such as medical insurance.
  • The Consumer Price Index weights rent much higher than the PCE which in turn weights medical higher. 

Items Chopped Off the Bottom

Trimmed Mean Inflation excluded items, table from Dallas Fed, annotations by Mish.

Trimmed Mean Inflation excluded items, table from Dallas Fed, annotations by Mish.

Chopping Methodology 

  • The Dallas Fed chopped off items with a combined weight of 24.07% from the low end.
  • This was "balanced" by chopping off items with a weight of 32.50% (100-67.5) at the top end.
  • Everything that went up by more than 9% annualized was chopped off the top culminating with gasoline up 103.5% and air transportation up 112.7%.
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Ultimately, the Dallas Fed discarded 56.57% of the entire PCE, heavily weighted by discarding high inflation items to arrive at a preposterous 2.8% year-over-year measure of inflation. 

Home prices rose another percent in November according to the latest Case-Shiller measures. The Fed does not even count that as inflation.

Home Prices Jump Another Percent, Fed Extremely Behind the Inflation Curve

Case-Shiller Home Price Index National and Top 10 - 2021-11

Current Measures of Inflation

  • CPI: 7.5% (January)
  • PCE: 6.5% (December)
  • Trimmed Mean PCE: 3.1% (December)
  • UIG: 4.6% (January)

None of the above measures factors in home prices. 

How Bad are Inflation Models, Expectations, and Forecasts vs Reality?

On November 24, I asked and answered How Bad are Inflation Models, Expectations, and Forecasts vs Reality?

Short Synopsis

Astrologers Would Likely Beat the Fed at Inflation Forecasting

Also consider Astrologers Would Likely Beat the Fed at Inflation Forecasting

The Fed claims to have tools to fight inflation. The last time we heard them so empathically was right before the housing bubble burst.

Behind the Curve

On January 25, I noted Home Prices Jump Another Percent, Fed Extremely Behind the Inflation Curve

Factoring in home prices, I have an alternate CPI at 9.70% as of November.

See the above link for details.

This post originated at MishTalk.Com.

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