Randall Forsyth of Barron’s considers the economic data driving decisions at the Federal Reserve.

Central bankers today seem to be equally scared of a chimera—inflation that stubbornly refuses to rise to their desired 2% level. Federal Reserve Chair Janet Yellen, for instance, has described persistent, sub-2% inflation as “a mystery,” especially given that the jobless rate has fallen to 4.1%, below what supposedly is full employment. Why the bankers think it desirable for prices to rise—and at that particular pace, which would halve consumers’ purchasing power in 36 years, roughly a generation—is another question. But for now, it’s settled theory and practice. …

… As for inflation, Peter Boockvar, chief market analyst for the Lindsey Group, has been pointing out for some time that the Fed’s PCE deflator is tamped down by what amounts to government price-fixing. This gauge measures health-care costs, according to Medicare and Medicaid reimbursement rates, not what patients pay. Total housing costs—notably rising rents—also have a smaller impact in the PCE deflator than in the more widely watched consumer-price index. As a result, the CPI is up 2% over the past 12 months; in which case, mission accomplished insofar as inflation is concerned.

But a new leading indicator of inflation that is gaining increased attention shows prices rising at nearly a 3% yearly pace, half again the Fed’s target. The New York Fed’s Underlying Inflation Gauge increased at a year-on-year rate of 2.96% in October, up from 2.84% in September. The UIG also shows the trend rate of CPI inflation to be 2.25%-3%, well above the actual rise in the CPI. …

… The professed fear of Fed officials about anemic inflation is that interest rates will be too low when the next crisis hits, leaving them less room to cut rates. In other words, they must raise rates now, in order to have room to cut them later.

Or possibly they’re worried that, as David Rosenberg of Gluskin Sheff writes, valuations are “on steroids.” …

… That leaves the Fed once again with a conundrum. Back in the 1970s, the central bank had to juggle high inflation against high unemployment. Now, it has to weigh rising inflation pressures, as indicated by the New York Fed’s UIG, against the risk posed by high and, arguably, inflated asset prices. How will new Federal Reserve chief handle the trade-off?