There were two significant inflation reports this week, the latest Consumer Price Index (CPI) report and the Producer Price Index (PPI) released by the Bureau of Labor Statistics (BLS). Both announcements came in below expectations, indicating that inflation should continue its downward trend. While this is undoubtedly good news, instead of focusing on the numbers, we want to dive into the deep end to review the critical concepts and terms used in the inflation reports that may not be common parlance for most readers. These concepts include core vs. total inflation, month-over-month changes (MoM), year-over-year changes (YoY), rolling annualized changes, and the difference between unadjusted and seasonally adjusted data. Understanding these items will help provide more clarity, bringing the underlying inflation situation to light.
First off, the CPI report tells us about the changes in prices paid by urban consumers for a representative basket of goods and services over time. It is common to hear CPI reporting in two ways, Core CPI and Total CPI, and it’s essential to understand the difference between them, as each provides unique insights into price trends and their potential impact on the economy and investments. Core inflation is a measure that excludes specific volatile components, such as food and energy prices, which tend to fluctuate significantly due to seasonal or geopolitical factors. By excluding these items, core inflation offers a more stable and consistent view of underlying price trends, making it easier to identify long-term inflationary pressures. Central banks and policymakers often rely on core inflation to guide their monetary policy decisions, as it can better indicate the economy’s overall health and the sustainability of price growth. For investors, core inflation can help reveal potential structural changes in the economy that may warrant adjustments to investment strategies.
Total inflation, on the other hand, considers all components of the Consumer Price Index (CPI), including the volatile food and energy prices. This measure provides a comprehensive view of the overall price level changes experienced by consumers. While total inflation can be more susceptible to short-term fluctuations, it’s still essential for understanding the immediate impact of price changes on consumers and the economy. For investors, total inflation can offer insights into how rising or falling prices affect consumer spending, corporate profits, and overall market performance.
In addition, to Core and Total, one can look at the rate of change in multiple ways: month-over-month, year-over-year, or any combination of rolling periods. Month-over-month changes are pretty straightforward; they’re the percentage change in the CPI between two consecutive months. For example, if the CPI increased from 100 in February to 101 in March, that’s a 1% increase (or 12.7% annualized). On the other hand, year-over-year gives us a bigger picture of inflation trends. To get the annual change, you’d compare the current month’s CPI to the same month’s CPI in the previous year. So, if the CPI in March 2023 is 110 and the CPI in March 2022 was 100, we’re looking at a 10% increase. These are simple enough, but it is also common to hear about inflation as a rolling annualized change. Rolling 3-month or 6-month annualized inflation views can provide a more stable and comprehensive perspective on inflation trends. These approaches help to smooth out short-term fluctuations and reveal underlying patterns that may not be as clear when looking at individual monthly data points.
Last but not least, let’s discuss unadjusted and seasonally adjusted data. The BLS gives us both, and here’s what they mean. Unadjusted data are the raw numbers the BLS collects without any adjustments for seasonal patterns. These numbers are great for looking at long-term trends but can be misleading for short-term comparisons because they don’t account for seasonal factors. For example, let’s say you’re checking out the price of fresh fruits and vegetables. The unadjusted data might show a big jump in prices during the winter months when supply is lower, which could make you think that inflation is speeding up during that time.
That’s where seasonally adjusted data comes in. The BLS adjusts these numbers based on historical patterns to eliminate the impact of predictable seasonal factors. This way, you can make more accurate month-to-month comparisons. Returning to our fruits and vegetables example, seasonally adjusted data would consider the typical winter price increase, giving you a clearer idea of the actual inflation trend during that period. While seasonally adjusted data offers valuable insights by accounting for predictable seasonal fluctuations, it’s important to recognize that this method has limitations.
One fundamental shortcoming of seasonally adjusted data is that it may not accurately capture the effects of unprecedented events, such as the COVID-19 pandemic, on economic indicators like inflation. Seasonal adjustments are based on historical patterns and trends, which may not hold true during extraordinary events or periods of significant economic disruption. The COVID-19 pandemic, for instance, has led to numerous unexpected shifts in consumer behavior, supply chain disruptions, and government policy interventions, all of which can affect inflation in ways that traditional seasonal adjustments may not fully account for. As a result, it’s essential to consider a combination of seasonally adjusted and unadjusted data when analyzing inflation during periods of significant economic upheaval, helping provide a more comprehensive understanding of the inflationary landscape.
That was a lot, probably (definitely) more information about the CPI report than you ever wanted to know. But hopefully, the next time you read an article or hear someone discussing inflation, you’ll have a much clearer understanding of the nuance in the numbers.
Economy
- U.S. equity markets finished slightly higher for the week ending April 14, with the S&P 500 up 0.8%, the Nasdaq up 0.3%, and the small-cap Russell 2000 up 1.5%. Inflation data was the main driver this week, with a weak retail sales number on Friday capping everything off.
- The annual inflation rate in the U.S. slowed to 5% in March, the lowest since May 2021, due to slower food price growth (8.5% vs. 9.5% in February), falling energy costs (-6.4% vs. +5.2%) and declining used car and truck prices (-11.6% vs. -13.6%).
- Compared to the previous month, the Consumer Price Index (CPI) exhibited a slight +0.1% increase, below the expected +0.2% growth.
- In March, the annual Core CPI rate in the U.S., which excludes food and energy prices, rose to 5.6% from the prior month’s 14-month low of 5.5% due to an increase in the cost of rent, matching market expectations.
- U.S. producer prices for final demand experienced a -0.5% MoM decrease last month, marking the most significant decline since April 2020 and defying expectations of a steady rate. A -1% reduction in prices for final demand goods, particularly gasoline (-11.7%), accounted for two-thirds of this decline. Prices for diesel fuel, residential natural gas, jet fuel, electric power, and fresh and dry vegetables also decreased. Concurrently, service prices witnessed a -0.3% dip, the most significant drop since April 2020, primarily driven by a -7.3% decrease in machinery and vehicle wholesaling margins.
- U.S. retail sales experienced a -1% MoM decline in March, a more substantial drop than the market’s prediction of a -0.4% decrease. This followed a downwardly revised -0.2% reduction in February, suggesting that cost pressures and escalating interest rates are affecting consumer spending habits. The most significant declines were observed in sales at gasoline stations (-5.5%), primarily due to lower prices; general merchandise stores (-3%); building materials and garden equipment (-2.1%); electronics and appliances (-2.1%); clothing (-1.7%); motor vehicle dealers (-1.6%); and furniture (-1.2%).
Stocks
- U.S. equities were in positive territory. Financials and Energy were the top performers, while Real Estate and Utilities lagged. Value stocks led growth stocks and small caps beat large caps.
- International equities closed higher for the week. Developed markets fared better than emerging markets.
Bonds
- The 10-year Treasury bond yield increased 23 basis points to 3.52% during the week.
- Global bond markets were in negative territory this week.
- High yield bonds led for the week, followed by corporate bonds and government bonds.
