As if inflation wasn't "mysterious" enough to the Fed already, recently the New York Fed joined the Atlanta Fed in releasing its own measure to track underlying inflation called, simply, the Underlying Inflation Gauge. What is notable is that this latest inflation tracker shows prices behaving quite differently from traditional indexes this year.

According to the UIG's August measure, broad inflation came in at a red hot 3.27%, the highest since September 2005. That compares with just 2.8% annual inflation according to the Labor Department’s CPI and an even more modest 2.0% as measured by the preferred PCE gauge of Fed policy makers.

Why the gap? Because the full data UIG incorporates dozens of additional variables outside of prices, including the unemployment rate, stock prices, bond yields and purchasing managers’ indexes. Furthermore, if Dudley is right, and there is structural disinflation going on, then the UIG would be much higher using a ‘traditional’ supply curve. Here, as Citi cynically noted recently, "structural disinflation is far from permanent, as the Mayor of London’s latest regulatory action illustrated very clearly. Anti-trust or other regulatory measures can end the new supply paradigm at any time."

Additionally, a lot of the disinflation in the New Economy may have been a function of high G10 unemployment, and urbanization in China: both of which have now ended as drivers of disinflation. 

But what is most troubling is that when one overlays the Underlying Inflation Gauge with core CPI, with a 15 month lead for the former, what emerges is the following troubling chart: it shows that all else equal, core CPI is set to spike in the coming months, and from its current level, is set to rise as high as 2.8%, matching the highest print since 2006 when the Fed Funds rate was around 5%, and a level which not even the Fed's latest "symmetric" mandate would be able to ignore, forcing Jay Powell to tighten even more aggressively over the coming year.