Primer: Seasonal Adjustment And The CPI

Complaints about seasonal adjustment of economic data are another relatively common feature of internet chatter. The complaints are related to the discussion of the previous section {in the manuscript, which is not written yet}, which was the view that economists are messing with the data to promote some agenda. (Since these complaints are often leveled by those of a bearish temperament, the usual complaint is that economic growth is overstated, and/or inflation is understated by seasonal adjustment.)

I do not label these complaints as a “myth” since I am unconvinced that anyone really believes that seasonal adjustment results in lower inflation rates. Rather, my feeling is that this is just exploiting the mistrust of economists and financial market commentators using a concept that is not often encountered.

In this section, I will stick to the seasonal analysis of U.S. headline CPI. Other countries also calculate seasonal adjustment using similar algorithms, and so the qualitative story is the same. The only difference that shows up is that some countries have a less stable seasonal patterns, and the actual pattern differs across countries due to different commercial practices.

Why Seasonally Adjust?

Seasonal adjustment of data is extremely common in financial and economic commentary. In most cases, commentators almost invariably stick to seasonally adjusted data in discussion, outside of niche areas like inflation-linked bonds. (I describe why below.) Other than detailed analysis of an economic release, non-seasonally adjusted data might only be discussed when the seasonal adjustment process has technical problems. In general, the inflation data I use in this book are seasonally adjusted (with the series in this section being an exception).

I will not attempt to explain how seasonal adjustment is implemented. Instead, it is easy to see the effects of seasonal adjustment by examining charts.

The chart above illustrates a key property of seasonally adjusted data: the annual inflation rate is almost identical to the non-adjusted series. (To repeat, annual inflation refers to taking the percentage change in the index in a month from the same month in the year previously.) I cut down the time frame to 2012 to end of 2019 so that we have a period of relatively stable inflation, which is important for the later charts. Since we are comparing the same month between two different years, the months are in the same season, and so there is no effect. Since most discussion of inflation involves looking at the annual rate of change, using the seasonally adjusted series does not create any distortions to the data. That is, there are no obvious costs to using the seasonally adjusted data – the annual inflation picture is unchanged.

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NOTE: This is an extremely preliminary draft of a section from my inflation primer manuscript.

Disclaimer: This article contains general discussions of economic and financial market trends for a ...

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