NY Fed Research Reveals Import Price Inflation Overstated by 21 Percentage Points, Suggesting Lower True Inflation

The Federal Reserve Bank of New York published research on its Liberty Street Economics Blog on January 14, 2026, revealing that official U.S. import price indices substantially overstate import price inflation due to incomplete quality adjustment [1]. The research, conducted by Danial Lashkari, Economic Research Advisor in the Fed’s Research and Statistics Group, employed a novel demand-based method to infer quality changes in imported goods, bypassing the traditional challenge of requiring detailed product characteristic data [1].

The methodology involved calculating substitution elasticity between imported and domestically produced goods, then inferring quality improvements by analyzing demand responses to price changes. If import prices rise but demand doesn’t fall as much as expected, the difference is attributed to quality improvements. Using quality-adjusted PPI data for domestic goods as a reference point, researchers calculated adjusted import price indices for 155 individual industries, finding that the official import price index showed a 13% increase over the study period while quality-adjusted measures indicated an 8% decline—a discrepancy of 21 percentage points [1].

The research identified imported machinery and electronic equipment, including computers and peripherals, as the categories accounting for most of the understated quality growth in official measures [1]. This finding has significant implications for understanding true inflation dynamics and potentially the Federal Reserve’s monetary policy path.

The NY Fed research aligns with observations from multiple Fed officials about measurement distortions in traditional inflation gauges. Governor Stephan Miran, speaking on January 14, 2026, stated that traditional inflation measures significantly overstate price pressures due to shelter costs and financial services cost imputations [2]. Miran noted that once these distortions are extracted, underlying inflation is running at approximately 2.3%, which is essentially within statistical noise of the Fed’s 2% target [2].

Regarding shelter costs specifically, Miran observed that average tenant rents appear to have finally caught up to new tenant rents, and with market rents running at a 1% rate for a couple of years, this suggests CPI rents will start to decelerate in the near future [2]. Miran also emphasized the upside disinflation risk, stating that “inflation is making such swift progress that it actually has the potential to undershoot” the target [2].

NY Fed President John Williams provided additional context on tariff impacts, noting that tariffs have already meaningfully increased U.S. prices of imported goods, although the full effects have likely not yet been felt. Williams estimated that tariff impacts have contributed approximately 0.5 percentage points to the current inflation rate of about 2.75% [3]. Meanwhile, Fed Philadelphia President Anna Paulson expressed “cautious optimism” toward the inflation outlook, expecting three-month inflation to reach 2% by the end of 2026 [3].

Equity markets exhibited modest reactions to the inflation-overstated narrative during the January 13-16, 2026 period. The S&P 500 closed at 6,949.96 on January 16, down 0.15% for the day and 0.20% over the four-day period. The NASDAQ Composite fell 0.45% to close at 23,533.83, with a 0.74% decline over four days. The Dow Jones Industrial Average declined 0.08% to 49,426.95, while the Russell 2000 small-cap index rose 0.36% and was up 2.02% over the four sessions [0].

Sector performance on January 16 revealed notable divergence. Real estate led gains at +0.58%, followed by industrials at +0.51%, while financial services was essentially flat at -0.02%. Conversely, utilities dropped 2.37%, communication services fell 1.11%, and healthcare declined 0.56% [0]. The relative strength in small-cap stocks suggests some market participants are positioning for a domestically-focused recovery as inflation expectations moderate.

The muted market response suggests the inflation-overstated narrative is already partially priced into market expectations, with investors focusing more on tariff impacts and the timing of Fed rate cuts rather than the quality adjustment debate itself [0]. This gradual absorption indicates a maturation of market thinking around the disinflation narrative rather than an immediate repricing event.

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The NY Fed’s demand-based quality inference method represents a significant methodological advancement in inflation measurement. Traditional quality adjustment approaches require detailed product characteristic data, which can be costly and difficult to obtain for the broad range of imported goods. By using observed market behavior—specifically, how demand responds to price changes—as a signal for quality improvements, researchers can infer quality growth without direct product-level data [1].

This approach has particularly relevant implications for technology-intensive imported goods, where quality improvements are continuous and substantial. The finding that imported machinery and electronics account for most of the quality understatement [1] suggests that the digital transformation of the global economy has systematically biased import price indices upward, potentially misleading both policymakers and market participants about true inflationary pressures.

The 21-percentage-point discrepancy between official and quality-adjusted import price indices over a 30-year period [1] represents a non-trivial adjustment that, if applied more broadly, could fundamentally reshape understanding of U.S. inflation dynamics. This has implications not only for monetary policy decisions but also for wage negotiations, contract indexing, and fiscal policy planning.

Governor Miran’s observation about policy lag—that the Fed may be “as slow to recognize this reversal as it was in spotting the post-Covid surge in prices” [2]—highlights an important risk in monetary policy implementation. If true underlying inflation is indeed closer to 2% or below, and the Fed maintains a restrictive policy stance based on potentially overstated headline measures, there could be unnecessary economic cost from overly tight conditions.

This risk is particularly relevant given the current policy rate level and the ongoing debate about the appropriate pace of rate normalization. If upcoming inflation data begins to reflect the quality-adjusted reality that the NY Fed research describes, the market’s expectation of approximately two rate cuts in 2026 could accelerate. However, the interaction between quality-adjusted disinflation and tariff-driven inflation creates a complex environment for policymakers to navigate.

The divergence between market expectations and potential policy reality represents an important consideration for market participants. If quality-adjusted inflation measures are valid, and if shelter costs indeed begin to decelerate as Miran suggests [2], there could be significant repricing opportunities in rate-sensitive sectors.

While the NY Fed research focuses on import price measurement, Governor Miran’s comments on shelter costs [2] highlight another significant source of potential inflation overstatement. Shelter costs carry substantial weight in both CPI and PCE indices, and their measurement methodology—particularly the distinction between new tenant rents and average rent measures—has been a persistent challenge for economists.

Mirans observation that average tenant rents have caught up to new tenant rents, combined with the 1% rate at which market rents have been running [2], suggests that the shelter component may be approaching a deceleration phase. This would provide additional disinflationary pressure beyond the import price quality adjustments, potentially creating a compounding effect on measured inflation rates in upcoming reports.

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: While the NY Fed’s demand-based quality inference method is methodologically sound, it introduces new variables and potential sources of error that require peer review and broader academic validation. The study period of 1989-2018 [1] predates recent tariff implementations and supply chain disruptions, creating uncertainty about the applicability of findings to current conditions. Additionally, the reconciliation between these findings and the Fed’s preferred Core PCE measure remains unclear.

: Even if import price inflation is substantially overstated, tariff-driven price increases represent a real cost pressure that quality adjustment cannot address. President Williams’ estimate that tariffs have contributed approximately 0.5 percentage points to current inflation [3] represents a structural headwind that could persist or intensify depending on trade policy developments. The interaction between quality-adjusted disinflation and tariff-driven inflation will be critical to monitor.

: While potentially overstated in current measures, shelter costs remain sticky in absolute terms and continue to impact shelter-weighted indices. Any deceleration in shelter costs will take time to be reflected in headline measures, and the pace of this deceleration remains uncertain.

: The BLS and other statistical agencies may incorporate improved quality adjustment methodologies in future revisions, which could create backward-looking adjustments to historical inflation data. This has implications for any financial instruments or contracts indexed to inflation measures.

: If quality-adjusted metrics accurately reflect reality, consumers are receiving more value from imports than price indices suggest. This implicit increase in purchasing power could support consumer spending growth beyond what headline inflation numbers imply.

: Should upcoming inflation data confirm the quality-adjusted disinflation narrative, there could be significant repricing opportunities in rate-sensitive sectors. The current modest market reaction [0] suggests that much of this opportunity remains unpriced, particularly in longer-duration assets.

: The relative strength in Russell 2000 during the January 13-16 period [0] may reflect early positioning for a domestically-focused recovery as the disinflation narrative develops. Small-cap stocks, which are generally more domestically focused, could benefit from both improved economic conditions and potential Fed easing.

: If import quality improvements are systematically understated, this may have implications for international trade balances and relative valuations of imported versus domestically-produced goods. Industries that have benefited from quality-adjusted import competitiveness may warrant renewed attention.

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The New York Federal Reserve’s research published on January 14, 2026, provides substantial evidence that official U.S. import price indices overstate import price inflation by approximately 21 percentage points over the 1989-2018 period, primarily due to incomplete capture of quality improvements in imported goods [1]. The research employs a novel demand-based methodology that infers quality changes from market behavior rather than requiring direct product characteristic data, making it potentially applicable to a broader range of goods than traditional approaches.

The findings align with broader Fed observations about inflation measurement distortions. Governor Stephan Miran estimates that once shelter cost and financial services cost imputations are accounted for, underlying inflation is running at approximately 2.3%, essentially at the Fed’s 2% target [2]. Miran also noted significant downside disinflation risk, suggesting inflation could undershoot the target.

Current inflation dynamics are complicated by tariff impacts, which President Williams estimates have added approximately 0.5 percentage points to the current rate of about 2.75% [3]. The interaction between quality-adjusted disinflationary pressure and tariff-driven inflationary pressure creates a complex environment that will require careful monitoring in upcoming economic data releases.

Market reaction to these findings has been modest, with minor declines across major indices and relative strength in small-cap stocks [0]. This muted response suggests the disinflation narrative is gradually being absorbed into market expectations rather than causing immediate repricing. The January 2026 CPI release and upcoming Fed speakers will be key data points to watch for confirmation or contradiction of these themes.

The quality-adjusted inflation perspective suggests that true economic conditions may be stronger than headline measures indicate, with important implications for monetary policy timing, sector positioning, and overall economic assessment. However, measurement uncertainty, tariff headwinds, and the need for methodological validation suggest prudent caution in drawing premature conclusions.