Measuring and Presenting Inflation
FESAC meeting discussant slides
Alan Detmeister
Global Economist
Tel: +1-212-713 1222
alan.detmeister@ubs.com
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Global Research
June 9, 2023
1
What many consider routine in the US is often lacking for other countries. For inflation:
- Seasonally-adjusted monthly inflation with a full breakdown of components.
- Relatively consistent PCE price data monthly from 1959, annual from 1929
- Monthly CPI/Cost of living data from 1921 (using 1967 base).
...as well as producer price, import prices, construction prices, wages , unit labor costs, unemployment,
output growth, etc.
Availability of these data are one reason that macroeconomic studies often focus on the US.
The variety, depth, and transparency of statistics should be commended.
First, a word of praise
Source: BEA, UBS
Source: BLS, NBER, UBS
2
1. Current macroeconomic data seems to have significant seasonal adjustment issues.
2. Data that is not timely is obscuring our view of current inflation
I’ll come back to these later
Two key areas for improvement in the current environment:
3
“High Inflation in BEA’s Statistics” by Bob Kornfeld lays out some great questions
I will provide my take on these questions out of order and apply them to all three agencies in the
presentations (BEA, Census, BLS)
4
Simple answer: Close enough for private sector work
Slightly longer answer: BEA publishes some national accounts data based on the system of national
accounts (SNAs).
BLS resumption of HICP was useful.
Are our measures internationally comparable?
Source: BLS, Eurostat, ONS Source: BLS, Eurostat, ONS
5
The first presentation mentions a number of possible additions:
1. PCE prices ex. food, energy, housing, used cars, financial services, portfolio management…)
2. “Supercore” inflation
3. Trimmed mean inflation
4. Sticky-price inflation
5. Various contribution tables
I worry that this path leads to an ever-proliferating set of tables and indicators that become quickly
becomes cumbersome and little used. While there are certain instances where additional
indicators should be provided (say, the Federal Reserve or other government entity requesting an
indicator based off a valid policy reason), it is probably not in the BEA, BLS, or Census’s best
interest to spend their limited resources on notably expanding various cuts of data that users could
re-jigger themselves
– An alternative approach might be to create a 1-to-2-page document clearly laying out the recommended
methodologies for creating contributions, and doing strip-outs/aggregation, from published data and let
users create the indexes they prefer.
How could our presentation of price changes be
expanded to better serve analyses of inflation?
6
In general, yes, more data availability is better --- particularly if it is data the statistical agency
already has (so low cost), can not easily be created from already published data, and is not readily
available somewhere else (so possibly high value).
But, again, it needs to be balanced against resource constraints and not reduce the quality of the
primary indexes or other needed improvements.
Should we release additional data?
7
Documentation has improved over the past 20 years across the board and this improvement
should be commended.
However, some lack of transparency still exists. Notably in PCE prices the sources and methods on
financial services and nonprofits remains opaque. Many categories are still listed as “BEA
composite of input prices”
…but gradual shifting over to PPI prices for some of these categories in recent years has been an
improvement in clarity.
Should we update our methods and documentation?
8
Methodology: Seasonal adjustment factors have swung around a lot during the pandemic. This amount of swinging is
probably inappropriate. (See various papers by Jonathan Wright) Additionally, the BEA bringing in only part of the seasonal
adjustment of the CPI in early February into PCE prices is a concern given the FOMC’s reliance on the measure.
Should we update our methods and documentation?
0.00%
0.10%
0.20%
0.30%
0.40%
0.50%
0.60%
0.70%
Jan-22 Mar-22 May-22 Jul-22 Sep-22 Nov-22 Jan-23
As of February 8, 2023
Current core CPI SA changes
1-month % change in seasonally-adjusted core CPI
Source: BLS, UBS
Revised seasonal adjustment factors in February notably changed the trend in
inflation. Only the upward revised months of October to December have been
brought into PCE prices
-0.25%
-0.15%
-0.05%
0.05%
0.15%
0.25%
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Current Pre-pandemic (Jan 2020 CPI release)
Approximate seasonal adjustment addition to not-
seasonally-adjusted core CPI change
Seasonal adjustment factors look to be set to take off around 16bp more
from the core CPI increase in June compared to pre-pandemic
Source: UBS based on BLS CPI data
9
There are some inconsistencies in the CPI, and hence PCE prices that rely on them. These
methodology inconsistencies can lead to inaccuracies in measuring current market inflation.
The CPI prices current market price for most items. But two relatively well known and important
exceptions are medical insurance and rents.
Should we update our methods and documentation? and
Are we measuring recent price changes accurately?
10
1. Monthly changes for CPI medical care insurance are currently (mid-2023) largely based on
comparing insurance company retained earnings during calendar year 2021 to calendar year
2020. The 2022/2021 comparison is likely to be brought in starting October. This is far, far too
delayed.
2. In September the 12-month change in CPI medical insurance will be close to -37% after rising
28% in the prior 12-month period:
This is a swing in the contribution to overall CPI inflation of roughly 64bp for a category that is
about 1% of CPI expenditures (relative importance weight) --- a notable impact for a category that
is not measuring current inflation.
CPI medical care insurance
Source: BLS, UBS estimates
11
• The release of the Adams, Loewenstein, Montag, Verbrugge paper was important because it
gave public-sector validity to what some in academia and the private sector (including at least
one prominent member of FESAC) had been pointing to.
• This paper likely had some influence in changing the tone of monetary policy and a factor
leading to a more nuanced look at core inflation using the 3-component breakdown (core
goods, rents, core services ex rents) that has become popular at the Federal Reserve and,
subsequently, among the financial community.
CPI/PCE rents --- the second very lagged component
12
Source: BLS, UBS construction using 77 components and trimming top
20% and bottom 20%.
• Using market rents rather than current CPI/PCE rents is likely more appropriate for monetary policy. It also
suggests monthly inflation rose much sooner and has fallen much quicker:
CPI/PCE rents
- 0.3%
- 0.1%
0.1%
0.3%
0.5%
0.7%
0.9%
1.1%
1.3%
Apr-18 Apr-19 Apr-20 Apr-21 Apr-22 Apr-23
CPI excluding food and energy Trimmed mean Median
Monthly % change
- 0.3%
- 0.1%
0.1%
0.3%
0.5%
0.7%
0.9%
1.1%
1.3%
Apr-18 Apr-19 Apr-20 Apr-21 Apr-22 Apr-23
Core CPI using market rents
Trimmed mean
Median
Monthly % change
Source: BLS, Apartment List, Zillow, UBS
All normal CPI items
Replacing CPI OER and tenants’ rent with market rents
13
1. The correlation with the NTRR and CoreLogic data suggests that alternative data sources (MLS
and other private sector sources) might be a way forward in the future if the BLS wishes to
construct these indexes monthly a fairly low cost.
2. A repeat rent index is unlikely to work for the CPI, which does not have revisions to NSA data,
but might be more feasible for a PCE-based price index, which does have revisions, but speed and
frequency would need to be increased.
3. I do believe that a monthly index would be preferable to a quarterly one
4. Given the importance of this index in the present inflation debate I would suggest releasing the
index every month starting as soon as possible and revise methods as needs dictate.
Additional thoughts on the NTRR index
14
1. Current macroeconomic data likely to have significant seasonal adjustment issues and are
making it harder to discern changes in inflation in real time.
2. CPI/PCE Rents and CPI medical insurance are not timely indicators and are obscuring our view
of current inflation
These are key areas where improvement efforts likely should be focused.
Thank you
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