The True Rate of Inflation

Dear Reader,

The Federal Reserve pursues its 2% inflation target with a zeal verging on derangement.

Yet it progresses toward its target as poor Sisyphus of Greek mythology progressed uphill with his rock — in vain.

Core inflation registered 1.9% in January… and 1.5% in June.

The most recent core inflation number?

A Sisyphean 1.4%.

The rock rolls downhill.

Here we speak of official inflation.

But is actual inflation dramatically higher?

Today we pierce the mask of statistics… expose the myth within… and hazard a true inflation reading…

The Fed’s 2% inflation appears as distant as the summit of Sisyphus’ hill.

Experts dispute the causes — depressed worker wages resulting from globalization, “secular stagnation,” the astrological misalignment of stars and planets, etc.

But assets such as stocks, bonds and real estate have been the scenes of dramatic inflation over the past several years.

And therein hangs an epic tale…

Joseph G. Carson, former global director of economic research at AllianceBernstein:

U.S. financial markets have in the last 20 years experienced three unprecedented booms in asset prices and two busts. During this span, the market value of real and financial assets held by households has increased more than $70 trillion…

$70 trillion!

Traditional inflation models exclude these asset prices.

But what if they were included?

The New York wing of the Federal Reserve has hatched a model for that expressed purpose…

The “underlying inflation gauge (UIG).”

This UIG incorporates not only consumer prices… but producer prices, commodity prices and financial asset prices.

It thus promises a true inflation reading.

The New York Fed:

The UIG proved especially useful in detecting turning points in trend inflation and has shown higher forecast accuracy compared with core inflation measures.

If we gauge inflation by this comprehensive model… the true rate of inflation is above the Fed’s 2% target… and roughly double the core rate.

But what?

Roughly 3%.


The latest reading shows inflation of almost 3% for the past 12 months, compared with [core inflation, which excludes food and energy]…

Since the broad-based UIG is advancing 100 basis points above [core inflation], it indicates that asset prices are large, persistent and reflect too easy monetary policy.

The lesson, clear as gin:

Inflation lives and thrives. But largely in assets.

And the kernel in the nut:

The UIG carries [an important message] to policymakers: The obsessive fears of economy-wide inflation being too low is misguided; monetary stimulus in recent years was not needed.

Obsessive fears of low inflation are misguided? Monetary stimulus in recent years was not needed?

This Carson heaves up strange and dangerous heresies.

The Paul Krugmans and Ben Bernankes and Larry Summers of the world will set him down as an agent of the Old Boy himself, an enemy of civilization.

As well claim that George Washington didn’t fell the cherry tree…. that the moon is 99.9% blue cheese… worse, that gold is money.

But what if the UGI is right?

Were decades of loose monetary policy an epic blunder?

Analyst John Rubino of

The really frustrating part of this story is that had central banks viewed stocks, bonds and real estate as part of the “cost of living” all along, the past three decades’ booms and busts might have been avoided because monetary policy would have tightened several years earlier, moderating each cycle’s volatility.

“For all sad words of tongue and pen,” lamented poet John Greenleaf Whittier, “the saddest are these: ‘It might have been.’”

A sound financial system might have been.

But let us not sob over milk spilled.

If the actual inflation rate runs at 3%, what does it portend for the economy… today?

We refer you to the dashed red line in the chart below:

Omen of Recession

The last two occasions this underlying inflation gauge crossed 3%, Zero Hedge reminds us, recession and bear markets followed.

It currently pushes against the 3% threshold.

So here we welcome our old colleague Catch-22 to the proceedings…

If the Fed aggressively raises rates at this late point, it would likely trigger a major stock market sell-off… and a recession.

As Jim Rickards has noted in these pages:

My view is the economy is fundamentally weak, the Fed is tightening into weakness and will eventually over-tighten and cause a recession.

But if the Fed doesn’t raise rates, the true inflation rate will likely soon exceed this critical 3% mark… inviting recession… and a market sell-off.

The Fed thus appears damned if it raises rates… and damned if it doesn’t.

But either way… damned…


Brian Maher
Managing editor, The Daily Reckoning

The Daily Reckoning