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Friday, January 09, 2009

ECRI's FIG Shows Inflation Pressure at a 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 December, 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 85.5 (1992=100) in December from 86.7 in November, though its smoothed annualized growth rate (charted below) ticked up to -36.5% from -37.7%. The gauge was pulled down in December by disinflationary moves in measures of commodity prices, vendor performance, unemployment and job growth, partly offset by inflationary moves in measures of loans and interest rates. A spokesperson for ECRI said:
"It is notable that the USFIG was in a clear cyclical downswing in mid-2008, when financial markets and monetary policy makers alike were mistakenly concerned about the threat of inflation. With the USFIG now sliding to a half-century low, U.S. inflation pressures are in full retreat."

Click to see larger FIG Growth Rate chart

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%.

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