Comment: How we measure inflation hides the bigger picture
Published 1:30 am Tuesday, July 19, 2022
By Justin Fox / Bloomberg Opinion
As you may have heard, the U.S. inflation rate for June was 9.1 percent. That is, the consumer price index for all items as estimated for June by the Bureau of Labor Statistics was 9.1 percent higher than it was a year earlier.
Other economic indicators generally aren’t measured this way. With retail sales it’s the percentage change from one month to the next that gets the headlines. With employment it’s the monthly change in the number of jobs. With gross domestic product, in the U.S. at least, it’s the annualized quarterly change.
In its monthly CPI news releases the BLS actually does mention the monthly percentage change — as in the change from May 2022 to June 2022 — before the annual comparison to the same month a year earlier, but this tends to get a lot less attention, probably because it’s so much smaller (1.3 percent in June) and harder to make sense of. That’s easy enough to fix, though, if we follow the GDP example and annualize the monthly CPI change.
Measured this way, U.S. consumer prices rose at a 17.1 percent annualized pace in June. That’s awful! But it is also possibly not very informative. Monthly CPI changes are volatile, and annualizing them just makes them more so.
To get past the volatility, policy makers and market watchers often focus on so-called “core” inflation that excludes food and energy prices. It rose 0.7 percent in June. Annualized that comes to 8.8 percent, compared with a 5.9 percent year-over-year gain.
Measured year-over-year, core inflation has been steadily declining since March. Measured month-to-month, it has been accelerating since then. And yes, it’s pretty noisy, but smooth it by annualizing the three-month change and the picture of accelerating core inflation remains.
I’m pretty sure that the monthly and three-month core inflation measures better reflect what’s been going on in the U.S. economy over the past year than the annual change does. There was a spectacular burst of inflation last spring that subsequently subsided, only to be followed by new, smaller but still major waves; the latest of which certainly hasn’t crested yet in the CPI data. For context, consider what the current GDP trajectory would look like if we measured it as we did inflation. Year-over-year GDP change will still be positive even if the Federal Reserve Bank of Atlanta’s current gloomy GDPNow forecast of a second quarter in a row of declining GDP comes to pass.
There are some questions about what those quarterly GDP declines really mean, given that job growth has continued at a healthy pace and GDP would have risen in the first quarter if it hadn’t been for a big increase in imports that may have reflected U.S. economic strength more than weakness. But it seems pretty obvious why we pay attention to quarterly GDP changes. In retrospect, annual GDP change gives a smoother, clearer view of the medium-term trajectory of the economy, but at turns in the business cycle that view is usually out-of-date.
To some extent all of the economic indicators discussed here are out-of-date, of course. The CPI is among the timeliest, but the numbers released this week are supposed to represent average prices over the entire month of June. There’s been much pointing in recent weeks to signs that inflationary pressures are receding; gasoline prices, among the biggest inflation drivers so far this year, are down 8 percent since mid-June. Maybe this will have an impact on the next CPI report. If it does, though, the place to look will be in the monthly changes and not the annual ones.
Justin Fox is a Bloomberg Opinion columnist covering business. A former editorial director of Harvard Business Review, he has written for Time, Fortune and American Banker. He is author of “The Myth of the Rational Market.”
