The New York Fed Staff Underlying Inflation Gauge (UIG)

Abstract

A measure of underlying inflation that uses all relevant information, is available in real time, and forecasts inflation better than traditional underlying inflation measures—such as core inflation measures—would greatly benefit monetary policymakers, market participants, and the public. This article presents the New York Fed Staff Underlying Inflation Gauge (UIG) for the consumer price index and the personal consumption expenditures deflator. Using a dynamic factor model approach, the UIG is derived from a broad data set that extends beyond price series to include a wide range of nominal, real, and financial variables. This modeling approach also makes it possible to combine information simultaneously from the cross-sectional and time dimensions of the sample in a unified framework. In addition, the UIG can be updated on a daily basis to closely monitor changes in underlying inflation—a feature that is especially useful when sudden and large economic fluctuations occur, as was the case during the 2008 global financial crisis. Lastly, the UIG displays greater forecast accuracy than many measures of core inflation. Editor’s note: This article’s data appendix has been updated to reflect the removal of a duplicate price series (CPI-U: Other fresh vegetables). The article’s conclusions remain the same. (December 2017)

Keywords: inflation, dynamic factor models, core inflation, monetary policy, forecasting

JEL Classification: C13, C38, C55, E31, E37