Why Inflation Reports are 6.5 Months Out of Date

The news has been all abuzz about inflation.  But as is typical with news, the reports may be misleading.  The reason is the inflation reports are 6.5 months out of date the day they are reported.

According to the Bureau of Labor Statistics, the November 2022 Consumer Price Index (CPI-U) one-year inflation rate dropped to 7.1% from 7.7% in October.  Unfortunately, those numbers don’t tell us where inflation is today.  Because the figure is a rolling average, plus a time lag in reporting, it actually represents inflation months earlier.

To explain, the November year-over-year (YoY) inflation numbers are reported on December 15, but these numbers describe inflation as of June 1.  They are 6.5 months out of date on the day they are published.  This means these reports are very unreliable for understanding a quickly changing inflation rate.  Other measures suggest current inflation is likely lower than reported.

The Average Age of Reported Data

Inflation is reported as a 12-month rolling average.  Two components comprise the 6.5-month delay, a 5.5-month delay plus another 1-month delay.  One way to understand why the 5.5-month delay exists is to draw 12 circles in a line, as shown in this chart.  The midpoint between the first and last points is 5.5 spaces from the first and 5.5 from the last.  In other words, when we measure inflation using 12 monthly measurements, the average age of the data is at the midpoint of exactly 5.5 months.

Similarly, the price average for each month occurs at the midpoint of the month.  For example, the average inflation rate measured throughout November equates to the average around November 15.  But the November numbers aren’t reported until December 15 or so, which is 1 month later.  So, the total delay is 6.5 months.

Visualizing Inflation Trends

The plot below shows the December 15 information release date as the purple vertical line on the right.  The year-over-year values are represented by the blue lines and circle markers with the corrected dates.  For example, the last point on the year-over-year plot is correctly placed on June 1, despite being reported on December 15.

We see from the blue lines that inflation has been on a steady path to lower levels.  If we extend the blue line to the current date, we can estimate that the inflation rate is likely much lower now.

The chart also shows the month-over-month inflation, scaled to an annualized level for comparison with the annual price changes.  These data are exactly 1 month out of date upon reporting, but they are the most up to date available.  Here we can see prices have actually decreased in 3 out of the last 5 months.  Inflation is typically lower during this time of year, so it’s possible we’ll see inflation rates in the next few months that are slightly higher.

Nonetheless, the Fed’s efforts appear to have been very effective. Over the last three months, inflation has averaged 2.1%, annualized. The 3-month average of seasonally adjusted inflation is 3.8%. See the explanation below.

How Inflation Reports Change Each Month

There is one final caveat about where we might see year-over-year inflation (blue) that will be reported in mid-January.  Each point in the YoY calculation is nearly identical as the prior value, except the oldest month drops from the calculation and is replaced with the newest month.  That means that the YoY number reported in January will drop the December 2021 monthly data and replace it with the December 2022 monthly data.  So, the YoY number is influenced by the addition of new data as much as it is influenced by the removal of data.

The December 2021 monthly inflation is not shown on the yellow line, but it would be one point to the left of the first point.  That number was reported as 3.7%, which is much lower than the inflation numbers from early 2022.  That means that when we drop the small number from ’21 and replace it with the new one, the overall number may not change much, even if the new one is also small.

Between the February ’23 and April ’23 reports, much larger numbers, as seen by the first three points on the yellow plot, will drop off the calculations.  Thus, the annual inflation rates may appear to drop more rapidly after January.

A More Up to Date Inflation Estimate

Some caution is warranted about using the three-month average.  The 12-month average helps to smooth out any noise in the measurements.  It also removes seasonal effects, such as the historical tendency for inflation to be lower in December.  Put differently, no 12-month “season” exists, so a year-over-year measurement automatically removes seasonality.  The 3-month average does not have this benefit unless it is performed on seasonally adjusted 1-month data.  The 3-month average of seasonally adjusted inflation is 3.8%.

Regardless, the most recent figures suggest that the Federal Reserve has done a better job tamping down inflation than the annual inflation signals.  Since October they have raised interest rates 1.2%, so we may see a further reduction in the coming months.  The futures markets appear to concur.

Often, news sources hyperventilate headlines.  While recent inflation news appears to be factually accurate, it is also misleading.  A more complete picture is formed by examining the data more carefully.  What becomes evident is that inflation has likely been lowered more than the headlines reveal.  Only time will tell if the trend continues.