New York Fed's New Inflation Gauge Is a Red Herring

Many investors are worried that an inflation surge is just around the corner, and some have sought confirmation in a new measure from the Federal Reserve Bank of New York: the Underlying Inflation Gauge. This indicator has advanced steadily in recent months even as measured inflation has slowed. Yet, there is reason to be skeptical of this signal, which isn’t telling us anything we don’t already know.

The UIG captures sustained movements in inflation from information contained in a broad set of price, real activity and financial data. The measure is presented in two ways. The first data set includes 223 disaggregated price series in the consumer price index -- the “prices-only measure.” The second data set includes the disaggregated price data as well as a wide range of macroeconomic and financial data for a total of 346 series -- the “full data set measure.” The common trend is isolated among all these factors using a dynamic factor model. Think of this as an average across different variables that measure the same concept.