What do the Independent Inflation Gauges Say?

It’s been pretty interesting to see the S&P 500 hold up rather well against a backdrop of plummeting inflation expectations.  According to the 10 year break-even inflation expectations are the lowest they’ve been since the last outbreak of the Euro crisis in the summer of 2011.

What’s even more interesting to me though, is how much nominal 10 year bond yields have actually risen.  The last few times we saw inflation expectations collapse it was mainly due to the 10 year falling more relative to TIPS.  In this case, TIPS have actually risen more than 10 year yields.  In each of the last few cases the market ended up being right about the low inflation trend, but this bond sell-off has a bit of a different flavor to it.

We all know that the government’s data is under extraordinary scrutiny and skepticism at all times.  That’s understandable given the amount of tinkering and tweaking that goes into a data set like the Consumer Price Index.  But what about the independent inflation gauges?  What are they saying?  Is it really different this time?  Is the stock market getting this one right?  In order to gauge the current environment and how valid the market’s views are, it is helpful to look at data outside of the government’s own inflation readings.


(Break-even Inflation Expectations vs SP 500)

The most prominent independent inflation gauge is the Billion Prices Index from MIT.  It’s beginning to show an interesting divergence from the CPI in recent months.  As the CPI sinks, the BPP rises to above 2.5%.  That’s still very low inflation, but the divergence is notable.



(Figure 1 – Billion Price Project US Inflation Index)

The ECRI’s Future Inflation Gauge is also showing low inflation by historical standards.  The latest reading of 103.9 is virtually flat compared to readings in recent years which is consistent with a very low rate of inflation.


(Figure 2 – ECRI Future Inflation Gauge)

The Orcam Housing Adjusted Price Index treats housing as both investment as well as consumption and includes the rate of change in house prices in the CPI as opposed to the BLS measure of Owners Equivalent Rent.  This index has shown much higher rates of inflation during bubbly economic periods like the housing boom, which I believe might have helped give the Fed greater insight into the environment and provide an alternative perspective to the common idea that inflation was low during the bubble.  It was anything but low when you look at the consumers most important balance sheet item (housing).

This index is also diverging from the CPI.  The latest reading of 3.29% is still low by historical standards, but certainly higher than the CPI.  Chart via Orcam Investment Research:


(Figure 3 – Orcam Housing Adjusted Price Index)

It’s interesting to see the various independent gauges and how they compare to actual market action.  It would appear that two of our independent gauges confirm the benign stock sell-off and higher inflation fears.


Got a comment or question about this post? Feel free to use the Ask Cullen section, leave a comment in the forum or send me a message on Twitter.
Cullen Roche

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services. He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance and Understanding the Modern Monetary System.

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  • JanVerR

    It will be interesting to see if your housing gauge continues to rise as housing improves and once again shows an environment with higher inflation than the Fed sees.

  • GreenAB

    this time the TIPS market was reacting to the treasury market.
    10y yields rose because of frontrunning on tapering fears.
    with tightening conditions and higher rates future inflation becomes less likely hence inflation expectations collapsed.

    if the markets are right remains to be seen.

    bond funds saw record redemptions over the last weeks. this money might end up looking for real assets.

    and early data indicates Europe might slowly be coming out of the slump, Japans Tankan looked good as well.

    after the financial crisis it was first China now the US who led the world economy. we still have to see inflation behave with two or more of the major economies growing…

  • TrainStation

    The government’s inflation numbers are skewed. To keep low government bond yields attractive?

    Gasoline was reported this morning to be up 3% yoy, my home homeowner’s insurance and property taxes are up 3 to 4%, auto sticker prices are up 2% but add in another 1% for lower mfr. incentives, groceries up 5%, gym membership up another 5%,….

    In the NYC area tolls are in the middle of a 87.5% increase. Tolls into the city in 2011 were $8, by 2015 they will be $15. Parking at the airport appears to go up 10% each year. Airfares are jumping up. Fares to Florida and Europe are up 25 to 30% over the past two years.

  • Geoff

    Nice inflation charts. There does not appear to be much clarity on the inflation front at the moment. Treasuries certainly don’t seem to be concerned about it, as seen in the breakevens. But this may simply reflect the fact that Treasuries are less a “market” these days and more a Fed policy tool. They are reflecting the Fed’s view. Treasuries aren’t worried about inflation because the Fed isn’t concerned.

  • TrainStation

    Medical insurance premiums for the office are up another 7%, on top of the 7% the year before. Every small business owner we deal with are claiming the same.

    Of course if you don’t work on Main Street and instead work on Wall Street, for the government or invest, you probably think the government inflation numbers are accurate.

  • Andrea Malagoli

    My impression is that the equity markets are much more fearful of the end of QE than the rise in inflation. At least for now.

  • Lee Colville

    A question Cullen…

    why not track the growth in “money” as well. There are the statistics M1, M2 etc. I’m not sure if they are relevant though as they include Reserves at the Fed along side normal transaction accounts but one is a bank asset and the other a liability.

    In the flow of funds report though you can look at check. deposit and currency, and Time and Saving Deposits. Isn’t the growth in this position the growth in “inside money” as you would call it and effectively tells me how much value my money is losing?

    This also seems to be growing much higher than inflation.

    Would be interested in your thoughts…

  • http://orcamgroup.com Cullen Roche

    The actual quantity of money doesn’t tell us much. Money is just the tool. It’s how we use the tool that actually matters. It’s entirely possible that you could print up a whole bunch of money and bury it in a hole. Or that there wouldn’t be worthwhile goods and services to purchases. That’s not usually the case, but focusing on money is like focusing on how many shovels a construction company makes in order to try to gauge the value of the houses they build. It MIGHT tell you something about the value of the houses, but it also might mislead you. The more important thing to understand is the actual point of sale and how money actually impacts the aggregate demand and supply in the economy….

    Make sense?

  • Tim

    Awesome explanation!

  • New Thought

    The best inflation measure, by a VERY wide margin, is Median Inflation. It contains no distortions like basket of goods choices or weightings, and it anticipates other measures of inflation by several months. I believe it is a national scandal that we don’t use it as our main inflation measure.

  • http://www.nowandfutures.com bart

    My Consumer Purchasing Power Index is around 4.4%


  • Lee Colville

    Understand your point but that is partly what concerns me. The money being created doesn’t flow evenly through the economy creating a uniform inflation. It seems to slosh around from one side to the other a bubble in tech, then a bubble in housing, then everyone gets scared and sits on it. Granted there is no causality here but I think cash/debt to gdp 300% vs 150% is likely to result at least the risk of more extreme fluctuations.

    Prices at the end of the day are just transactions occuring at the margin. Why is inflation is assets considered good but cpi bad? Are bonds in a bubble or was gold?

    The other day I saw the wording in the Federal Reserve Act as was suprised to see the reference to limiting the growth in money and credit aggegrates in line with productivity growth. Perhaps whoever wrote that new better. There is no dual mandate. By controlling the aggregates the Act has the goal of maintaining price stability, obtaining full employement, and maintaining moderate interest rates (I don’t have the exact wording in front of me now).

    They picked out two and ignored the rest. Debt has risen and to make it serviceable they have had to continually ground down interest rates.

    Financial intermediation can be a great thing, even reckless lending, when it gets channeled into innovation and infrastructure. However, with cash/debt levels so high it seems that we are all being forced to become macro-economists and too much money flows to pure speculation. In the end we are all being forced to become macro economists wondering whether house prices will rise 10% or drop 10%. All depends on what mood the banks are in, as you say they control the “flow” of money. I am struggling to see when we get to such extremes how this can be anything but a distraction from the pursuit of productive enterprises.

  • jaymaster

    Here’s some interesting data that shows inflation hitting a typical family over the past few years (second part of the graphic).


    (Yes, I saw this linked on zero hedge, but that doesn’t necessarily make it tinfoil hat material).