Saturday, May 16, 2009
More Magical "Seasonal Adjustment" to the CPI
Hmm the headline says no CPI inflation in April. Yet as usual, prices did in fact rise, but they were seasonally adjusted away. According to the first sentence of the BLS press release: "The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.2 percent in April before seasonal adjustment, the Bureau of Labor Statistics of the U.S. Department of Labor reported today."
So to make sure we all understand, the actual, unadjusted CPI has increased four straight months in a row; see for yourself by scrolling to the bottom here. From Dec 2008 to Apr 2009, unadjusted CPI rose from 210.228 to 213.240. That's a 1.4% increase over four months, which works out to an annualized price inflation rate of 4.3%.
On the other hand, if you look at the seasonally adjusted CPI figures, the annualized price inflation from Dec 08 to Apr 09 is only 1.6%.
Got that? If you look at how much prices actually changed, they are rising at a 4.3% annualized rate (from December to April). But if you just read the headlines on CNBC, you would think prices are rising only at a 1.6% annualized rate.
If this were over a two-week period, OK fine. But this discrepancy between actual and "seasonal" is now over a four-month period. That's a big season, eh?
Remember what the principle of a seasonal adjustment is: For the above numbers to make sense, the BLS has to say, "Sure, prices always tend to rise a bunch in the first third of the year, but then they tend to fall later on." So that means even if prices are flat in the coming months, at some point the BLS is going to have to bump up the official inflation rate.
Unless of course you think the BLS is manipulating the numbers to keep the public worried about a "deflationary spiral." After all, you can't justify pumping hundreds of billions into the financial markets--and saying things like, "Don't worry, we'll take it out once prices begin rising"--if the annualized inflation rate is already at least 50% higher than the top of the Fed's "comfort zone."
On this topic, see Scott Sumner's great post. He's wrong of course, but beautifully so.
So to make sure we all understand, the actual, unadjusted CPI has increased four straight months in a row; see for yourself by scrolling to the bottom here. From Dec 2008 to Apr 2009, unadjusted CPI rose from 210.228 to 213.240. That's a 1.4% increase over four months, which works out to an annualized price inflation rate of 4.3%.
On the other hand, if you look at the seasonally adjusted CPI figures, the annualized price inflation from Dec 08 to Apr 09 is only 1.6%.
Got that? If you look at how much prices actually changed, they are rising at a 4.3% annualized rate (from December to April). But if you just read the headlines on CNBC, you would think prices are rising only at a 1.6% annualized rate.
If this were over a two-week period, OK fine. But this discrepancy between actual and "seasonal" is now over a four-month period. That's a big season, eh?
Remember what the principle of a seasonal adjustment is: For the above numbers to make sense, the BLS has to say, "Sure, prices always tend to rise a bunch in the first third of the year, but then they tend to fall later on." So that means even if prices are flat in the coming months, at some point the BLS is going to have to bump up the official inflation rate.
Unless of course you think the BLS is manipulating the numbers to keep the public worried about a "deflationary spiral." After all, you can't justify pumping hundreds of billions into the financial markets--and saying things like, "Don't worry, we'll take it out once prices begin rising"--if the annualized inflation rate is already at least 50% higher than the top of the Fed's "comfort zone."
On this topic, see Scott Sumner's great post. He's wrong of course, but beautifully so.
Comments:
Annualising a some-month inflation rate can be misleading. I remember in the UK last year, annualising the inflation rate of the first 6 months of the year, we had a figure of about 8%. Actually the inflation rate fell at 4-5% some month later.
Anyway, if we expect high inflation rate in next months it is correct to try to read any possible sign!
An other point, subjective perception of inflation rate is always biased. We had such experience in Italy in 2002, with the canghe from Lira to Euro. On the other end, that change clearly showed that the inflation rate is an average that is good in macroeconomics, but it always misleading when dealing with a particular consumer. I.e.: difference between "individual inflation" and the "grand total average" can also be very high.
Anyway, if we expect high inflation rate in next months it is correct to try to read any possible sign!
An other point, subjective perception of inflation rate is always biased. We had such experience in Italy in 2002, with the canghe from Lira to Euro. On the other end, that change clearly showed that the inflation rate is an average that is good in macroeconomics, but it always misleading when dealing with a particular consumer. I.e.: difference between "individual inflation" and the "grand total average" can also be very high.
# posted by 
: May 16, 2009 6:53 AM
: May 16, 2009 6:53 AM
So I am "beautifully" wrong. Keats said "Beauty is truth, truth beauty--that is all/Ye know on earth, and all ye need to know."
On the other hand, I'm not sure where we'd be if we had poets running our economic policies.
On the other hand, I'm not sure where we'd be if we had poets running our economic policies.
RW, I think we've had this dispute before. If something grows at a certain amount in 4 months, then I annualize it by raising it to the power of 3.
That might not be the convention, but it's proper math (arithmetic?).
Scott, I would take a poet over Bernanke any day.
Scott (if you are still checking), are you going to admit you were hopelessly naive if there aren't offsetting downgrade seasonal adjustments later in 2009? I.e. they will have to report higher s.a. inflation than what the actual inflation is, at some point. Right?
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That might not be the convention, but it's proper math (arithmetic?).
Scott, I would take a poet over Bernanke any day.
Scott (if you are still checking), are you going to admit you were hopelessly naive if there aren't offsetting downgrade seasonal adjustments later in 2009? I.e. they will have to report higher s.a. inflation than what the actual inflation is, at some point. Right?
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