Economists and federal policymakers cheered last week when July inflation data came out. Overall consumer prices were flat compared to June.
However, with prices up 8.5% compared to last year, conservative commentators point out that complaining about the monthly zero inflation rate is hypocritical.
Which number should Americans look at? Experts say both — in addition to a bunch of other indicators if they want to understand price action.
“I think the whole debate is a little silly,” Employ said of US economist Alex Williams.
How about CPI
The Consumer Price Index, which measures a specific basket of goods and services, is not an accurate instrument. This is an average that masks large dips and spikes in specific items. For example, in July, higher housing and food prices were offset by lower energy prices.
The CPI also leaves out details about how prices move across different income brackets or demographic groups. (There are many ways to improve the CPI.)
There is a limit to what it can tell us about the economy, so Williams recommends looking at other types of data or news to show where prices correlate with monthly CPI is consistent.
For example, to put the monthly inflation data into context, Williams cross-checks specific industries in the index with what purchasing managers in those industries say to reveal where prices are likely to go
On the other hand, the CPI annual rate reflects what happened in the 12 months preceding the latest data. That’s why some economists suggest that when the two numbers are far apart, the media will cover the two numbers in the headlines, confusing the average American.
Why can’t people understand CPI?
Justin Wolfers, a professor of economics at the University of Michigan, says a lot of the confusion about inflation may be generational question. No one in the U.S. under the age of 60 has experienced inflation in their adult life, he said.
He added that Wall Street economists are mostly concerned with monthly data because they know what inflation has been like in previous months. Meanwhile, annual increases are important to workers who are negotiating wages so they can ask employers to match the cost of living.
“Each number is an answer to a question,” Wolfers said. “If what I’m doing is forecasting the future path of inflation, so-called core measures do a better job.” Core inflation excludes energy and food prices, which tend to fluctuate up and down on fleeting issues.
Where does inflation come from?
In terms of inflation data, July may be a one-off. “I’m not crazy enough that just because headline inflation went to zero last month, it’s going to go to zero again at any point in the future,” Wolfers said.
He expects Prices will increase in the coming months, but not more than 1% compared to the previous month.
“Some months are as low as one-quarter, some months are as high as three-quarters … in that range,” Wolfers said.