Inflation is here. There is no doubt, but that number will be around 2%. The only question that is unclear is whether there will be overshoot beyond the 2% level. Clearly inflation in the Eurozone is still not near 2%, but all inflation placed bets seem to surround the target level that have set by central banks. Investors have to ask the simple question of whether the beyond 2% is realistic.
A place to help answer that question is the NY Fed Underlying Inflation Gauge (UIG) which looks at disaggregated data of price and prices plus fundamentals using a dynamic factor model. The latest numbers below show a growing gap between the two UIGs and the CPI.
The price based UIG shows stability around 2% but the full data set measure has accelerated to above 3 which is highest levels we have seen since before the Financial Crisis. The current gap between the full and prices measure is also at the highest level in over a decade and a half.
Putting stock in these number should cause any investor to think about their bond duration exposure and whether they should be holding more commodity exposure.