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Gauging underlying inflation

A measure of trend inflation from the New York Fed

The FRED Blog has discussed why measuring inflation trends is important for policy analysis. In a nutshell: The month-to-month inflation rate changes too often and by too much to reliably inform financial decisions. To address this challenge, researchers use different methods to study the difference between temporary and persistent changes in consumer prices.

The FRED graph above shows consumer price inflation (the black dashed line). It also shows two versions of the underlying inflation gauge (UIG), a recently added data series measuring the trend component—that is, the persistent component—of inflation. The series is produced by economists at the Federal Reserve Bank of New York. They use consumer price index data from the US Bureau of Labor Statistics (BLS) and a dynamic factor model, a technique that helps identify the shared features of large sets of economic data, to construct the two trend estimates:

  • The full data set measure (the blue line) combines many of the BLS price data series with several macroeconomic and financial variables.
  • The prices-only measure (the red line) solely employs BLS price data.

The graph shows the trend estimates are less volatile than the month-to-month inflation rates. Also, the data suggest the June 2022 peak in inflation had a large transitory component and the upward persistent trend reversed course soon afterward.

For more information about various inflation measures, check this short video of Mark Wright or read on about other series in FRED:

  • The Bureau of Labor Statistics reports a consumer price index commonly known as “core CPI” that excludes the prices of two historically volatile prices: food and energy. Learn more about core CPI here.
  • The Federal Reserve Bank of Cleveland reports the trimmed mean of the CPI by excluding the price components that show the most extreme monthly changes. Learn more about trimmed means here.
  • The Federal Reserve Bank of Atlanta reports a sticky price CPI after sorting the components of the CPI into “flexible” or “sticky” (slow to change) categories. Learn more about the sticky CPI here.
  • The Federal Reserve Bank of Dallas reports a trimmed mean personal consumption expenditures (PCE) by excluding the price components that show the most extreme monthly changes from the inflation measure targeted by the Federal Open Market Committee of the Federal Reserve. Learn more about trimmed means here.

How this graph was created: Search FRED for “Underlying Inflation Gauge: Full Data Set Measure.” Next, click the “Edit Graph” button, select the “Add Line,” and search for “Underlying Inflation Gauge: Prices-Only Measure.” Do that again to add the “Consumer Price Index for All Urban Consumers: All Items in U.S. City Average.” Last, select the “Line 3” tab, and use the “Units” dropdown menu to select “Percent Change from Year Ago” to transform the index series into the inflation rate.

Suggested by Diego Mendez-Carbajo.

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