Sunday, May 20, 2012

US Inflation Data: Seasonally Adjusted CPI Shows Zero Change for April

The headline number in the latest inflation report from the Bureau of Labor Statistics, the Consumer Price Index for all urban consumers, seasonally adjusted, showed zero change for April 2012. Unrounded data for the month, restated at an annual rate, showed inflation of 0.36 percent, down from 3.54 percent in March.

Without seasonal adjustment, the inflation rate for April was 3.7 percent. Motor fuel prices contributed to the difference between the rates with and without seasonal adjustment. Motor fuel prices usually rise in April, but this year, they rose much less than usual. The unadjusted increase was 1.8 percent, but the seasonally adjusted change was -2.6 percent. 

Food and energy prices are volatile and usually account for much of the month-to-month change in the CPI. We can remove their effect by taking food and energy out of the CPI. Economists call the result the core inflation rate. The monthly change in core inflation, stated at an annual rate, was 2.92 percent in April, about the same as in March.

Another way to remove volatility is the 16% trimmed mean CPI published by the Federal Reserve Bank of Cleveland. It removes the 8% of prices that increase most and the 8% that increase least in each month, whatever they are. The 16 percent trimmed mean CPI increased at an annual rate of 1.94 percent in April, down about half a point from the March rate.

Economists use adjusted measures of inflation, such as the seasonally adjusted, core, and 16 percent trimmed mean indexes, because they are looking for underlying trends that are relevant to the formulation of economic policy. Changes caused by seasonal factors, and changes like the price of oil, which are determined in world markets, are not highly relevant to policy making. Consumers, on the other hand, look at price changes as they happen in the real world, without seasonal adjustment. Far from ignoring prices that change more than usual, they may give them exaggerated importance. For that reason, the rate of inflation as perceived by consumers is often higher than inflation as measured by economists. For a detailed discussion of the difference between perceived and measured inflation, see this earlier post.

To see longer-term trends in inflation, it is useful to look at year-on-year changes, which compare each month’s price level with that of the same month in the year before. All year-on-year measures of inflation rates slowed during the global recession then rose again for most of 2011. All-items and core inflation have converged to rates of just over 2 percent in 2012. The Fed considers inflation of about 2 percent to be consistent with its mandate to maintain price stability.

Follow this link to view or download a classroom-ready slideshow with charts of all the latest inflation data.

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