Seasonal Adjustments and Inflation

Yesterday, we spilled quite a few pixels discussing the various ways inflation has been impacting the economy. Not only did we see Core Producer Prices spike 0.4% for April, but Crude Oil broke $129 (now over $130). This leaves manufacturers facing the unpleasant choice of raising prices, or squeezing margins.

But it has been the BLS seasonal adjustments that caused the most angst lately. April PPI and CPI have built in expectations of a seasonal rise in energy prices. BLS’ goal is to report actual changes, not temporary ones. But problems can arise in this methodology, especially when you have runaway prices — like we have in Crude Oil — that impact the usual seasonal variations.

For example, crude energy materials "only" advanced 4.1% in April, with crude petroleum gaining 4.5 % and natural gas prices rising 4.3%. After the seasonal adjustments, these prices appeared rather odd:  They showed energy prices falling by 0.2%, while gasoline costs dropping 4.6%.

Why so odd an outcome? Seasonally adjusted gasoline prices looked
much better than they actually were because the price of gas climbed
more sharply in percentage terms in April 2006 and April 2007. For
April 2008, this led to a more favorable number. (Note: BLS seasonal
adjustment formulas look back five years).

There may be a second factor at play. Take a closer look at the prior month’s data, March 2008: Crude energy
materials advanced 13.4%, crude petroleum surged 17.5%, and natural gas
prices increased 11.4%. This leaves us to consider other possibilities:
It may be that the expected seasonal increases have already taken
place. Or, we may be looking at a secular shift in energy prices,
making seasonal adjustments a bit of a distraction.

Regardless, there is no free lunch, and that even applies to seasonal adjustments. John Crudele of the NY Post notes that what the BLS taketh away in SA, they must eventually return. Remember, seasonal adjustments must zero out over 12 months. Crudele was referring to CPI, but its just as applicable for PPI.

Let’s go to the Uh-oh moment:

"Beginning in June," [BLS economist Pat] Jackman said, the seasonal adjustments "will start adding in" inflation, which will be reflected in July’s CPI.

That doesn’t necessarily mean that the whole CPI figure – which includes many other prices – will necessarily be staggeringly high. But unless prices begin to come down for other products, it could have a substantial effect.

If you don’t seasonally adjust the figure, inflation would be running at a 7 percent annual rate.

Here’s the one thing you need to know about seasonal adjustments: what goes in, must come out. But at the end of the 12th month, the adjustments need to be neutral. The payback time, according to Jackman, will begin with the June figure and continue for the rest of the year, and the timing of that isn’t particularly good."

This means we should expect some ugly data runs in July. Yet again, another reason to always consider the Year-over-year data also.

Hypocrite watch: In terms of punditry, watch who ignored the SA for the April release, but emphasizes them for the July one…   



Producer Price Index: Crude Energy Materials
chart via Federal Reserve Bank of St. Louis


John Crudele
NYPost, May 20, 2008

Producer Price Index (PPI)
Producer Price Indexes – April 2008 pdf

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What's been said:

Discussions found on the web:
  1. jacksoo commented on May 21

    I know you’re a very keen music fan. Check out this young Londoner – in the vain of a few Dusty Springfield like new entrants -Duffy being another. Hope yu like, I think she’s got a cracking voice – like you I’m also a keen Madeleine Peyroux fan.

  2. BG commented on May 21

    It still amazes me how we must back into the government statistics each month in order to make ANY sense of how they could possibly have reached such results. In other words, the results are so absurd, so contrary to reality that we have to rationalize how the results were reached every time a report comes out. This is no place for intuition.

    You can get better, more timely results from a high school marketing class. And yes…only God knows how much tax-payer money is spent to produce this garbage.

  3. Mike J commented on May 21


    I’ve noticed posts the past few days have had fewer comments than normal. RE: your increased site traffic as a possible bullish indicator, is recent lower comment volume/site traffic bearish?


    BR: It might be — but its also been more technical topics, so that could be an issue.

    I have also raised the anti-spam shield a few notches, so that might be a factor. Also, anything that has been flame bait, too far off topic, or personal attacks to other commenters has been unpublished.

  4. mhm commented on May 21

    “If you don’t seasonally adjust the figure, inflation would be running at a 7 percent annual rate.”

    And _that_ is the BS in BLS. Like there is no option but annual rate. The annual rate must also be ‘flat lined’ to ~2%, whatever the means, even if it grossly defies reality.

  5. craig commented on May 21

    Mike J:

    I’ve noticed that also and was thinking something similar, that it’s the calm before a storm. There has been just enuf of a bear mkt rally to lull a lot of people to sleep and then WHAM….investors start looking at inflation, compressing corporate margins, weak consumer spending, lower business cap ex, more layoffs, etc. and we get a resumption of mr. bear. i’m not predicting it, but it’s a very plausible scenario.

  6. Ironman commented on May 21

    The way seasonal adjustments work for inflation is very reminiscent of how rates of return are typically calculated – they’re always highly dependent upon the values of the starting and ending points.

    Maybe a better question is why the BLS doesn’t present inflation data using a rolling 12-month average or a 12-month linear regression? Either approach would accommodate seasonality factors and discount unsustained spikes and troughs in the data while detaching the inflation measure’s current over-reliance on the first and last month’s inflation index values.

  7. John Ryding commented on May 21

    Core finished goods PPI prices were again higher than expected, rising 0.4% in April. The year-overyear core PPI inflation rate picked up to 3.0% in April, the highest since December 1991, from 2.7% in March.

    • Overall PPI prices were lower than expected, rising only 0.2% in April as food prices were unchanged and energy prices fell 0.2% (PPI gasoline prices declined 4.6% in the month). Over the last 12 months, overall PPI prices have risen 6.5% (a moderation from the 6.9% year-over-year increase reported for March).

    • Pipeline prices were again very elevated in April as core intermediate goods prices increased 1.2% (up 5.8% year-over-year) and core crude goods prices jumped 7.9% (up 24.6% year-over-year). Over the last three months, core crude goods prices have soared at a 76.8% annualized rate and core
    intermediate goods prices are up 12.4% on the same basis.

    This report, along with the medium-term inflation expectations reading from May’s
    Michigan consumer sentiment report, is likely to seriously trouble the Fed on the inflation front. The rate of core finished goods price inflation is now at a 16½-year high on a year-over-year basis and the readings on core pipeline prices point to an even higher inflation rate ahead. Last Friday’s consumer sentiment report showed inflation expectations at a 12-year high. Given the inflation story, it is looking increasingly unlikely that the Fed will cut rates again in this rate cut cycle.

  8. DonKei commented on May 21

    Here’s a few things causing inflation, in no particular order:

    1) Ethanol subsidies. Think of it as burning an additional fifty cents per gallon for each gallon consumed, without any economic benefit for the trouble.

    2) The Iraq/Aghanistan wars/occupations. Imagine setting fire to a $2 billion pile of money every week. That’s what we’re doing there. Spend $500 million to build a “bunker buster” bomb, and then use it on an empty cave in the Afghanistan highlands. There’s a real good return on your investment.

    3) Corporate welfare. Bear Stearns, Countrywide, Citi, Fannie, Freddie, FHA, etc. Basically the residential real estate industry and the financial industry have been nationalized. Poof! There goes another billion or so every week, perhaps every day, as prices are not allowed their necessary downward adjustment. Add to this list, SLM, the student loan company, and its industry.

    4) Plain old boring fiscal deficits of about another billion dollars a day.

    5) Negative real interest rates spurring the creation of more and more funny money.

    et al.

    All this is playing out in the only arenas we don’t control–the international markets for commodities and foreign exchange.

    All we’ve seen thus far are the financial system squall lines. The storm is perched over the warm waters of federal government inflationist chicanery and gathering strength daily. This will not end well.

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