The lesson from the 1980s that everyone seems to have forgotten (or never wanted to know), is that bank losses from interest rate risk merely set the stage. It's the strategies that insiders use to loot their doomed institutions that cause so much trouble. As you read about what happened at SVB, remember that insider loans are the leading indicator of looting.

One week ago, I wrote that my point estimate of the decrease in inflation during the last quarter of 2022 was 300 basis points, with a subjective uncertainty interval of (-100, 400).

The data for February offer less support for a large decrease in the inflation rate. My updated point estimate is a decrease in the inflation rate of 250 basis points, with an uncertainty interval of (-200, 350).

The odds that inflation fell still seem to be higher than the odds that it increased, but the difference is not as big as it seemed before.

TL;DR

Using the not seasonally adjusted CPI-U less food and energy, the average rate of increase for the months of October, November, December and January, was 6.5% in 2021–2. In 2022–3, the average for the same four months was 3.5%—down by 300 basis points.

What’s Going on with Seasonal Adjustment of the CPI?

This week, I discovered that I could no longer reproduce the graphs I posted last month about inflation. My stomach tightened as I contemplated the correction I was apparently going to have to publish. Where had I gone wrong?

It turns out that I wasn’t the problem. The graphs changed because the data changed. In February, the Bureau of Labor statistics changed the seasonal adjustment factors that it applies to the CPI and used these new factors to modify the data I display for 2022.

The changes are big. Using the old adjustment factors, the seasonally adjusted index for CPI-U less food and energy increased at an annualized rate of 3.1% during the last quarter of 2022. Using the adjustment factors, it increases at an annual rate of 4.2%, an increase of 110 basis points.

A quick look at the raw monthly inflation estimates suggests that while there may be some seasonal patterns, in a noisy and evolving world, it will be very hard to estimate them with confidence. And I don’t like surprises. So henceforth, I’ll just stick with the unadjusted data.

In my post on the CPI numbers from one month ago, I argued that the data on inflation was better than most news reports suggested. When inflation is falling, the average rate over the last 12 months – the type of measure that government officials and news reports tend to emphasize – give us an indication of the current rate of inflation that is biased upward.

When I wrote last month, I said that it is not hard to imagine that the fight against inflation could be over soon. The data for December provide additional support for this optimistic assessment, but they do bring into sharper focus the question of when we should declare victory. What should the new target rate of inflation be?

If you are worried that the decision today by the Fed to increase rates by only 50 basis points is a sign that it is giving up on the fight against inflation too soon, you may not realize how good was the news that we received yesterday about the current rate of inflation.

The reason you might have missed this good news is that most discussions of the data focus on an average inflation rate observed over several months. Averaging has the advantage that it filters out noise but the disadvantage that it can hide news about a change in the underlying trend.