Staff Reports
The FRBNY Staff Underlying Inflation Gauge: UIG
April 2014 Number 672
JEL classification: C13, C33, C43, E31, E37

Authors: Marlene Amstad, Simon Potter, and Robert Rich

Monetary policymakers and long-term investors would benefit greatly from 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. This paper presents the “FRBNY Staff Underlying Inflation Gauge (UIG)” for CPI and PCE. 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. It also considers the specific and time-varying persistence of individual subcomponents of an inflation series. An attractive feature of the UIG is that it can be updated on a daily basis, which allows for a close monitoring of changes in underlying inflation. This capability can be very useful when large and sudden economic fluctuations occur, as at the end of 2008. In addition, the UIG displays greater forecast accuracy than traditional measures of core inflation.

Note: The list of UIG inputs in the data appendix of this staff report has been updated to include variables that were inadvertently omitted (October 2017) and to remove a duplicate price series, "CPI-U: Other fresh vegetables" (December 2017). The article's conclusions remain the same.
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