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.

One of the side-stories in the FTX saga is the fawning portrait of Sam Bankman-Fried (SBF) that Sequoia Capital published less than 2 months before the collapse of his financial empire. The part that has already raised eyebrows comes toward the end: After my interview with SBF, I was convinced: I was talking to a future trillionaire. Whatever mojo he worked on the partners at Sequoia—who fell for him after one Zoom—had worked on me, too.

I learned everything I needed to know to understand the crypto-crisis (and the great financial crisis) from the Savings and Loan crisis of the 1980s. For those too young to remember, I suppose it might be useful to resurface the paper that George Akerlof and I wrote three decades ago: Looting: The Economic Underworld of Bankruptcy for Profit.