Fed: “Underlying Inflation” at a 13-Year High

By: Ryan McMaken

According to the Federal Reserve’s Underlying Inflation Gauge , the 12-month inflation growth in June was 3.33 percent. That’s the highest rate recorded in 158 months, or more than 13 years. The last time the UIG measure was as high was in April 2005, when it was at 3.36 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 has shown a higher rate of inflation than the CPI, most of the time in recent years.

In June, while the UIG was 3.33 percent, the CPI growth rate was 2.9 percent. This was a 76-month high for the CPI.

The use of only consumer prices 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. The fact that the broader measure of inflation is climbing to the highest level seen in more than a decade is apparently not a matter of concern.

In fact, there is now speculation that the Fed — recognizing that tariffs will harm economic growth  — may back off its stated plans for continues small hikes in the key rate.

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