Adjustments to Seasonal Factors Alter Inflation Estimates
Every February the BLS updates the seasonal factors for each component in the Consumer Price Index (CPI) to reflect developments during the previous year. The updates are applied to the previous five years of CPI data (in this case, revisions cover back to 2007). During the update process, some components even change seasonal status. For example, this year, the largest component in the index—Owners’ Equivalent Rent (OER)—changed from a seasonally adjusted component to an unadjusted series. Also, every other February, the BLS updates the weights (or relative importance values) of all the component series to reflect expenditure changes. Usually, these revisions don’t change much, but this year, they led to a modest change in the near-term trend of a few key underlying inflation measures.
The revised seasonal factors can have a modest effect on the median CPI, as it is calculated from a set of ordered price changes (from smallest to largest). Any change in a component price could change the ordering, and thus the median. Over the past three months, the new seasonal factors have served to push up the growth rate in the median CPI. This was especially apparent last November, when the median CPI was revised up from 1.1 percent to 2.3 percent, leading to an upward revision in its near-term (3-month) growth rate—from 2.1 percent to 2.4 percent through December.
After factoring in a 3.0 percent jump during January, the 3-month growth rate in the median CPI rose to 2.6 percent. This is higher than the median’s 12-month growth rate of 2.4 percent (which is the highest this rate has been since April 2009). Echoing the upward pressure signaled by the median CPI, the sticky-price CPI—which tracks the price changes in the more persistent components of the market basket—rose 3.0 percent in January, outpacing its 3-month growth rate (2.7 percent) and its year-over-year growth rate of 2.2 percent.
|Percent change, last|
|1 mo.a||3 mo.a||6 mo.a||12 mo.||5 yr.a||2011 average|
|Consumer Price Index|
|Excluding food and energy (core CPI)||2.7||2.2||2.1||2.3||1.8||2.2|
|16% trimmed meanb||2.9||2.0||2.3||2.6||2.1||2.6|
- a. Annualized.
- b. Calculated by the Federal Reserve Bank of Cleveland.
- c. Author’s calculations.
- Source: Bureau of Labor Statistics.
Interestingly, the inflation signal stemming from the sticky-price CPI is largely unaffected by changes to seasonal factors. In fact, after the last revision the 3-month annualized growth rate in the sticky-price CPI changed by less than 0.1 percentage point, on average. This is far less than the 1.1 percentage point average change in the flexible-price CPI trend, suggesting that changing seasonality is just another source of noise that statistics like the sticky-price CPI help to eliminate.
Update: There was an unusual mishap with this month’s release. When this article was first posted on February 23, we noted that the weight of financial services in the consumer market basket had shot up to 2.2 percent, though previously it had never come close to 0.5 percent. On March 7, the BLS announced that it had discovered “an anomaly” and the weight of financial services had been revised and was now back in line with historical norms at 0.2 percent.
Taking a longer-term view of the data reveals that the 12-month trend in the CPI (which is not seasonally adjusted), has continued to converge toward the growth rate in underlying inflation measures, softening from 3.9 percent last September to 2.9 percent as of January 2012. However, underlying inflation appears to have increased over that time period, as the core CPI and trimmed-mean measures have risen from a range of 2.0 percent-2.5 percent to 2.3 percent-2.6 percent from September to January.