16 May 2009

More Magical "Seasonal Adjustment" to the CPI

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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.

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