The most closely watched proxy of inflation in the US is the Consumer Price Index calculated by the Bureau of Labour Statistics. When we refer to US inflation in this blog, that is what we usually refer to. The CPI is calculated by measuring the price of a basket of goods and services the average urban consumer purchases. However, this process is often not as easy as it sounds. The BLS has thousands of personnel compiling this data to get to key measures of economic activity. This data plays a crucial role in shaping monetary policy and investor sentiment.
The BLS also adjusts inflation data seasonally, so that the seasonally adjusted CPI, or unemployment, does not reflect routine, seasonal fluctuations. At the end of every year, they published the revised data, often due to the process of seasonal adjustment, so that it reflects all the new information gathered over the year.
This year's adjustment saw inflation for December fall from 0.3% to 0.2%, and November rise from 0.1% to 0.2%, leaving the yearly inflation rate of 3.4% unchanged. The Core inflation data for December also remain unchanged.
The stock market reacted very favorably to this adjustment, as the S&P500, Nasdaq and Dow Jones indices rose Friday. However, many economists commented that this was an overreaction by the market, and the adjustment was not very significant. Even though the fall of the inflation rate for December is good news for the Fed that inflation has decreased more than previously announced, the consensus by economists seems to be that the data won't have a significant impact on the direction of monetary policy, and the timing of the rate cuts.
This revision also serves as a reminder that economic data is only an estimator of the key changes in an economy, and can't be fully accurate. Therefore, policymakers often rely on different sets of data from multiple sources when arriving at decisions.
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