ECRI's Future Inflation Gauge: Inflation Pressure at 50-Year Low

The Economic Cycle Research Institute, a New York-based independent forecasting group known as ECRI, said inflation pressure is at a 50-year low. (More about ECRI.)

Underlying inflationary pressures dropped further in January 2009, according to ECRI's U.S. Future Inflation Gauge (USFIG). The value of the USFIG lies in its ability to measure underlying inflationary pressures and thereby predict turning points in the U.S. inflation cycle.

The USFIG declined to 81.8 (1992=100) in January from 84.5 in December, while its smoothed annualized growth rate (charted below) slipped to -38.8% from -37.9%. The gauge was pulled down in January mainly by negative contributions from measures of loans, vendor performance, unemployment and job growth, partly offset by a positive contribution from a measure of commodity prices.

Commenting on the data, Lakshman Achuthan, Managing Directors ECRI said

"With the USFIG locked in a clear cyclical downswing, U.S. inflation pressures areessentially non-existent. Rather, there are continued downward pressures on U.S. consumer prices."

(click to enlarge)

The very low US-FIG means means the Federal Reserve can keep the Fed Funds rate low since inflation pressure is still in a cyclical decline.

The Fed Funds target rate is currently a range between zero and 0.25%.

Comments

[Tatertot:]

thanks for this information

Does this try to measure the inflationary pressure for the CPI or the core CPI (or some other metric)?

Feb 08 10:40 PM

[bearfund:]

The index is misnamed; it appears to be measuring things that contribute to aggregate demand for goods and services, not inflation. While still useful, I don't think anyone would be surprised to learn that demand is at a 50-year low. This data point serves only as additional confirmation of virtually all other data sources and what everyone already knows.

Drawing conclusions about appropriate monetary policy based on aggregate demand is difficult at best and extremely dangerous at worst. The monetary base has exploded in the past two years. The Fed Funds Rate already has little or no bearing on the real cost of borrowing, so concluding that weak aggregate demand justifies (or, worse yet, requires) that the rate be kept low is fallacious. And reducing the incentive for individuals to save does little to spur demand: most people would rather get no interest than be without funds and unemployed, those who are already unemployed can't save anyway, and those who saved in the past will simply continue moving away from dollars and into gold. None of this achieves the central bankers' goal of increasing aggregate demand. Meanwhile as production, responding to the real changes in demand, continues to shrink, the money supply is expanding at an absurd rate. As people and corporations transition away from buying on credit toward paying with cash, the cash stockpiles and weak production will force prices dramatically higher, especially for essentials. The basic cost of living will continue rising rapidly, most likely at an accelerating rate, even while production of luxury goods and services and aggregate debt-fueled demand continue to plummet. The result is a windfall for the last decade's profligate spenders and debtors, and a kick in the head for ordinary workers and savers.

The appropriate monetary policy at this juncture would be to increase short-term interest rates to a modest level that encourages and rewards saving (4% might be reasonable), while selling short long-dated Treasuries and buying IG paper and bonds to lower spreads. This would give good companies an opportunity to deleverage using their own cash flow while forcing the hopeless cases into bankruptcy. It would also rein in monetary expansion and limit future increases in the price of necessities. As this unwinding proceeds, the Fed's role in determining the size of the money supply should be slowly reduced and the Fed itself ultimately phased out in favour of circulating gold and silver. Debt as a fraction of real GDP must be greatly decreased, preferably to less than 10%. The public debt should be repudiated and a constitutional amendment passed prohibiting the government from borrowing for periods longer than one year and requiring that its outstanding debt be limited to the portion of a given year's tax revenues that have not yet been received.

There is a way out of this that does not require hyperinflation, but both the politicians and the central bankers are unable to see it. It doesn't fit with what they believe about macroeconomics, so they don't even consider the possibility that their way is the path to ruin. But it is, as surely as increasing supply causes prices to fall.

Feb 09 12:17 AM

[Jimbo:]

Please allow my input as a consumer. When I go to the grocery store, prices have either increased, or food that is packaged has gone from 16 oz. to 12oz. My electric utility has raised its' rates a cool 25%. Gasoline has resumed its' increase. My real estate taxes have gone up to make up for the decline in appraised valuations. My savings in the form of investments are down approximately 70%. As a retiree, my income is down and I am now asking for dividend payments, if there are any, instead of reinvesting said dividends. Like millions of fellow citizens, I am now longer buying anything that isn't absolutely necessary because my REAL living costs are RISING and income is NOT. I submit the ordinary citizen is facing STAGFLATION. The folks at ECRI are drinking fermented KoolAid!

Feb 09 11:40 AM