Why headline numbers about rising costs don’t always reflect the real world

Finance


Have fun with numbers.

Specifically, the cost of living numbers that so many people, including the Federal Reserve Board, are watching very closely.

Here’s a classic example of headline numbers making big news, but sometimes you need to dig into more detailed numbers to understand what’s really going on.

Let’s start with the consumer price index figures released by the Federal Bureau of Labor Statistics on May 10th. The headline figure was 4.9%. However, even though this is a 12-month number, it is clearly not recent CPI gains.

how can i know that?

Look at the monthly numbers and use common sense.

Yes, the monthly change adds up to a figure of 4.9% of headlines. But detailed numbers show that 2.1% of that 4.9% (nearly 43% of the overall increase) occurred in just two of the 12 months, last May and June. ing.

After recording a massive 1.2% rise in June, the 10-month period from July to April saw a total rise of 2.8%.

Now, let’s do something unconventional but logical, using an approach I recently learned from Campbell Harvey, a professor of finance at Duke University’s Fuqua School of Business.

Instead of being bound by the traditional 12-month numbers, let’s annualize the 10-month numbers. Annualized means expanding the number of 10 months to 12 months. This gives us a figure of 3.36%, but for simplicity let’s call it 3.4%. This is a more accurate reflection of what is happening in the economy today than the 4.9% figure.

Yes, the 3.4% figure is still high compared to what we were used to before inflation started about two years ago. But 3.4% say he’s far less scary than 4.9%. And it’s much more real.

US Treasury Secretary Janet Yellen met with US Federal Reserve Chairman Jerome Powell before the start of the G7 Finance Ministers and Central Bank Governors Meeting.  Conference opening session at Toki Messe International Conference Room, Niigata, May 11, 2023.Mayama Public Administration/Pool Via Reuters

Fun with Inflation Numbers: US Treasury Secretary Janet Yellen meets with US Federal Reserve Chairman Jerome Powell. (Komasa Mayama/via pool, Reuters)

Here we come to a lesser known but very important inflation indicator. That’s the personal consumption spending figure from another federal agency, the Bureau of Economic Analysis.

Little known to the public is the PCE figure, which is the inflation indicator used by the Federal Reserve. When you hear that the Fed wants to bring inflation down to 2%, you’re talking about PCE numbers, not CPI numbers.

The Bureau of Labor Statistics and the Bureau of Economic Analysis release information on different days with different lag times, so the latest PCE numbers we have are for March.

The headline figure was 4.2%. But if you start counting from his July when PCE fell 0.1% from him, he’s only up 2.3% over the nine months total. Annualizing this 9-month figure to a 12-month figure gives an increase of just over 3% (3.06%). Round this to 3.1%.

That’s not the 2% the Fed wants, but it’s a lot closer than the headline figure of 4.2%.

Why don’t you start your calculations in July instead of using the full 12-month period? Because it will be reflected when it starts. Like the consumer price index, it’s a matter of judgment.

Looking at the monthly numbers, we can see that things have changed dramatically since June’s big jump.

No, I am not defending the Federal Reserve or the Biden administration to say that inflation is completely under control and all is well. However, depending on which metric you use, you can see that inflation has fallen sharply over the last nine to ten months.

So if you want to know what’s happening now instead of what happened in the past, there’s a better way to look at things than using the arbitrary 12-month convention.

A final note: If you go back a few years to when inflation started, you’ll find that using 12-month numbers masked the fact that inflation was rising sharply.

Why didn’t you write about this at the time? Because it never occurred to me to delve into the details of the cost of living numbers until I spoke with Professor Harvey of Duke University.

Now I have a reason to do so. And so do you.

Alan Sloan has been writing about business for more than 50 years and is a seven-time winner of business journalism’s highest honor, the Gerald Loeb Award.



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