Last year, Joseph Salerno cautioned against the use of year-over-year CPI inflation rate calculations.
This way of calculating the annual inflation rate is backward looking, because the most recent monthly rate is heavily outweighed by the previous eleven months’ rates.
In contrast, calculating the annual inflation rate by compounding and annualizing the most recent monthly or quarterly rate of change in the CPI gives a better idea of what inflation currently is and how it may be trending.
The Bureau of Labor Statistics just recently announced a new CPI statistic (which has many flaws on its own) for August 2023, and it was reported by them and the broader economic and financial news media as a 3.7 percent increase since last year. Consider this boilerplate reporting from CNBC: “The August 2023 consumer price index rose 3.7% on an annual basis, the U.S. Bureau of Labor Statistics said Wednesday.”
While 3.7 percent exceeded expectations, it understates the current rate of price increases. Using, as Salerno suggests, the compounded annual rate based on the July to August percent change results in a whopping 7.8 percent.
You won’t find this figure in the official CPI release, but it is easy enough to calculate on your own or with the St. Louis Fed’s CPI graph and data series.
This way of presenting CPI inflation is not mere manipulation to make inflation look worse than it is. Salerno explains:
Now this may seem like merely a technical matter, but some forms of data presentation are clearer and more useful than others, especially during a time of rapid inflation. Presenting the inflation rate as a year-over-year calculation obscures shorter-term but substantial fluctuations that may occur and what they portend for the future, especially if inflationary expectations are beginning to become unhinged.
Read Salerno’s full article here.
