Earlier this month, we learned from the latest official U.S. jobs report how dramatically revisions can change the picture of the economy’s performance. Today’s official inflation numbers – presenting the Consumer Price Index (CPI) – contained some interesting revisions, too, and they’re enough to keep me in the “transitory” camp on the future of price increases at least a month more – and specifically, as long as the ”baseline effect” will remain in place.
In plain English, this means that I still believe that inflation nowadays– which is unmistakably high by historic standards and painful for so many Americans – results mainly from major distortions in the economy created by the CCP Virus and related regulatory and behavioral curbs. Also affecting inflation’s annual rates of change throughout 2021 and into early 2022: the fact that the previous year’s inflation – the baseline – was so abnormally low. In fact, one of the key revelations of the revisions is that the baseline effect for “headline inflation” (the figure that tries to cover everything) has increased some in recent months, and therefore has played a moderately larger role in pushing up the latest numbers.
First, though, let’s look at the monthly changes in the overall inflation rate going back to January, 2021, along with the revisions (the number furthest to the right):
Dec-Jan: 0.26 percent now 0.24 percent
Jan-Feb: 0.35 percent now 0.44 percent
Feb-March: 0.62 percent now 0.64 percent
March-April: 0.77 percent now 0.64 percent
April-May: 0.64 percent now 0.70 percent
May-June: 0.90 percent now 0.88 percent
June-July: 0.47 percent now 0.45 percent
July-Aug: 0.27 percent now 0.33 percent
Aug-Sept: 0.41 percent unrevised
Sept-Oct: 0.94 percent now 0.87 percent
Oct-Nov: 0.78 percent now 0.69 percent
Nov-Dec: 0.47 percent now 0.58 percent
Dec-Jan: 0.65 percent
There’s no doubt that a sequential speed-up took place between December and January. But even with the revisions, decelerations took place between October and November, and November and December. In fact, October remains the peak month for sequential inflation.
It’s important to note that these slowdowns in the inflation rate don’t mean that prices are actually falling. Instead, they mean that they’re not rising as quickly. And although that may sound like a pretty weak reason for encouragement, it counts for more because a major reason that inflation is considered so dangerous is that it tends to feed on itself – and actually grow at increasing rates.
So slowdowns are good news, even if they’re not good enough news. Moreover, the revisions for two of the last three months have been downgrades; in other words, since October, on net, headline inflation has been weaker than originally estimated.
Revisions haven’t had the same effect on so-called “core inflation” (which strips out food and energy prices because they’re viewed as unusually volatile for reasons having little or nothing to do with the economy’s supposed susceptability to inflation). But the absolute rates have been lower than those of headline inflation, and the rates of change have fallen on net since October, too.
Dec-Jan: 0.03 percent now 0.05 percent
Jan-Feb: 0.10 percent now 0.15 percent
Feb-March: 0.34 percent now 0.30 percent
March-April: 0.92 percent now 0.86 percent
April-May: 0.74 percent now 0.75 percent
May-June: 0.88 percent now 0.80 percent
June-July: 0.33 percent now 0.31 percent
July-Aug: 0.10 percent now 0.18 percent
Aug-Sept: 0.24 percent now 0.25 percent
Sept-Oct: 0.60 percent unrevised
Oct-Nov: 0.53 percent now 0.52 percent
Nov-Dec: 0.55 percent now 0.56 percent
Dec.-Jan: 0.58 percent
But the real importance of those baseline effects and revisions come through in the annual inflation data. The table below shows the annual rates of change by month starting again in January, 2021. The left and center columns show the previous estimates and the revisions, and the right column shows the revisions of these rates for the last few months of baseline year 2019-2020:
Jan: 1.37 percent now 1.36 percent
Feb: 1.68 percent unrevised
March: 2.64 percent now 2.66 percent
April: 4.16 percent now 4.15 percent
May: 4.93 percent now 4.94 percent
June: 5.32 percent now 5.34 percent
July: 5.28 percent unrevised
Aug: 5.20 percent now 5.21 percent
Sept: 5.38 percent now 5.39 percent
Oct: 6.24 percent unrevised 2019-20 from 1.19 to 1.18
Nov: 6.88 percent now 6.83 percent 2019-20 still 1.14
Dec: 7.12 percent now 7.10 percent 2019-20 from 1.31 to 1.28
Jan: 7.53 percent 2019-20 from 1.37 to 1.36
The big takeaway: The November and December annual inflation rates were both revised down by non-trivial degrees, and the baseline effects for October, December, and January have gotten bigger (because the annual inflation rates for 2019-2020 for these months have been revised down, too.
As with their monthly counterparts, the absolute annual core inflation rates are lower, the baseline effects aren’t quite as great, but they’re present anyway:
Jan: 1.40 percent now 1.39 percent
Feb: 1.28 percent now 1.29 percent
March: 1.65 percent now 1.66 percent
April: 2.96 percent now 2.97 percent
May: 3.80 percent now 3.81 percent
June: 4.45 percent unrevised
July: 4.24 percent now 4.20 percent
Aug: 3.98 percent now 3.96 percent
Sept: 4.04 percent unrevised
Oct: 4.58 percent now 4.59 percent
Nov: 4.96 percent now 4.95 percent 2019-20 from 1.63 to 1.64
Dec: 5.49 percent now 5.48 percent 2019-20 from 1.61 to 1.60
Jan: 6.04 percent 2019-20 from 1.40 to 1.39
The baseline effect distortion of both sets of inflation figures should end when the February statistics come out (next month). Unless new revisions change the picture? But there are several other reasons inflation may moderate further going forward.
The economy’s widely predicted growth rate for the first quarter of this year is predicted to be wheezing and even negligible. As long as it lasts, much more sluggish economic activity should undercut price increases. (At the same time, what may be in store is stagflation – a punishing combination of weak growth and strong inflation.) The new CPI figures may well persuade the Federal Reserve to tighten monetary policy earlier and more vigorously than currently expected, which should also slow growth. (The Fed’s preferred measure of inflation, called the Personal Consumption Expenditures index, or PCE, will be updated later this month. It usually tracks the CPI pretty closely.) And rising prices seem to have put further economic stimulus off the table in Congress.
Another (and maybe final?) V-shaped pandemic recovery, prompted by the fading of the Omicron CCP Virus variant, could always overcome all these growth obstacles. So could continuing supply chain snags and shortages – especially in industries like semiconductors, whose products are used in so many products. Or all these uncertainties and wildcards could keep the economy and inflation in a turbulent state, and keep complicating policymakers’ challenges in simultaneously fostering adequate growth and acceptable inflation.