It’s no secret that inflation has diminished in recent months, but the slowdown in price increases may be more significant than popular measures suggest.
Changes in inflation, as measured by the Consumer Price Index published Thursday by the Bureau of Labor Statistics, are typically given as year-over-year change, that is, how much prices increased over the last 12 months. In December, consumer prices were up 6.5% over the year—a pretty steep hit to the pocketbook, but a lot better than the 9.1% figure from June. The slowdown has been even more dramatic if calculated in annualized three-month rolling averages, as the chart below shows.
The 12-month method is frustrating because it “dilutes the new information a lot,” said Bill Nelson, Chief Economist at the Bank Policy Institute, an advocacy group representing banks, in a commentary. Recent trends are much more evident in the three-month annualized rolling average of inflation data. That figure is produced by taking the change in prices over a three-month period, then multiplying it by four to calculate how much prices would change over the entire year at that rate.
In other words, the three-month rolling average method focuses more on the recent past, and gives a much more up-to-date view of inflation trends than the 12-month change. Showing inflation this way avoids a pitfall of the 12-month inflation rate, which is that if price increases stabilize, it’s extremely slow to show the improvement.
“Annual inflation numbers can adjust quickly on the way up, but they will take time to come back down because of the lag in calculating inflation,” John Horn, a professor of economics at Washington University in St. Louis wrote in a commentary earlier this year. “It takes a long time for the 12-month lag in prices to catch up to today’s higher prices and get inflation back down to the 2% range we expect.”
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Washington University in St. Louis. "WashU Expert: Comparing Annual Inflation Changes Each Month Can Distort Reality."