Monthly Movements of Core Inflation
Here is a graph from FRED showing monthly percentage movements of core inflation. (link to data)
There used to be ranges that core inflation moved within. The monthly change either hit the maximum of that range or the minimum with some breakout movements in between. Monthly movements made sense by looking at 12-month moving averages.
Since about the year 2000, the visible ranges have disappeared. The monthly movements are more free-form. Thus monthly core inflation numbers should be more accurate now. However, there is still noise in the movements which belie that prices are sticky and should not change so erratically.
The best way to view monthly inflation numbers is with “Annualized” moving averages as Tim Duy does. Here is an example from Tim Duy.
Look at the time period from mid-2010 to mid-2011. You see large positive monthly movements in the second half of 2010 but the 12-month moving average was rising much more slowly. In the first half of 2011, inflation was coming down, but the 12-month moving average was still rising and kept rising until mid-2011. So the noisy monthly movements were designed to keep the 12-month moving average on a steadily rising trend.
Discerning the correct and steady trend of core inflation is the key.
Back in the early 80’s, my undergrad teacher would use an 18-month moving average. But if we knew which monthly moving average is being manipulated on a monthly basis, we would understand each monthly change better.
EL – Let me get this straight. You think the folks at the BLS are fudging the monthly inflation numbers? You think there is a conspiracy? A conspiracy that includes the most senior people at the BLS, Treasury Department and the Fed. You think that Janet Yellen is on in this. Possibly Obama is in on this too?
But why? Why would these people be creating a shroud of lies? Do you think they are enriching themselves on this distorted information? Is that what you think? Or is there some even more nefarious scheme going on?
EL – for this post you earn the Tin Foil Hat award. Wear it in good health.
For anyone to think that the government does not lie, create distortions of the truth and cover up would not be living on this planet for the past 60 years. Today we have more distortions of the truth from the government than probably any time in our history and for anybody intelligent not to know this is what is really shocking to me. With our government as it is today lies and deception have become the norm and should no longer be any surprise. Don’t you read anything?
William – You’re entitled to any opinion you like. But I say you are on soft ground with this one.
Paul Krugman is a Nobel Economist. He writes editorials for the NYT several times a week. Do you think he is crazy? Do you think he is part of the conspiracy regarding monthly inflation numbers?
Read the following from Krugman. He debunks everything EL says in his post. He ends with:
“Sorry, folks, but there’s no grand
conspiracy to hide inflation.”
If you want to go around believing that thousands of people over the years at the BLS have been deliberately deceiving the public go ahead, I can’t stop you from wearing a tin foil hat.
But I would like to understand where this comes from. Why in heavens name would the BLS, Treasury, The Fed (all the regional presidents and Yellen, Bernanke and Greenspan) all be lying about something that has no policy implications? (Annual inflation is an issue, but month to month is just noise.)
The link to the Krugman post on exactly this topic. Please read it and then tell me you think Krugman is a liar and part of the conspiracy.
BLS started reporting two extra decimal places in 2007. So that is six digits up from just 3 back in the 60s. So yes, the monthly fluctuations in the growth rate shrank a lot.
David:
Welcome back. It has been a bit since I have seen you here. If you care to post something at AB, let us know.
It’s late, and I am not sure my previous comment was very clear. Just consider an index level of 40.0 and monthly growth of 0.03. BLS reports 40.0 then 40.0 then 40.1 then 40.1… lots of rounding error. Now consider index at 160.0 and monthly growth of 0.12. 160.0 160.1 160.2 160.4… Looks different. Then 240.000 and growth of 0.18…
Anyway, back in 60s month to month inflation calculated from reported index was mostly rounding error. Today, not so much.