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Why year-over-year inflation changes aren’t a great indicator of today’s inflation

Justin Ho Aug 9, 2023
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While year-over-year inflation can be helpful to filter out temporary changes that happen month-to-month, it can gloss over the recent slowdown in inflation. Fredric J. Brown/AFP via Getty Images

Why year-over-year inflation changes aren’t a great indicator of today’s inflation

Justin Ho Aug 9, 2023
Heard on:
While year-over-year inflation can be helpful to filter out temporary changes that happen month-to-month, it can gloss over the recent slowdown in inflation. Fredric J. Brown/AFP via Getty Images
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The Labor of Department is slated to release the latest consumer price index on Thursday, which means we’re going to hear a lot about how much consumer prices rose compared to this time last year.

That number — how much prices rose year-over-year — is a big deal in the world of economic data. But in today’s economy, that number can also be a little misleading.

You can think of the year-to-year inflation number as a pretty simple math question: First, take how much prices rose last August. Then, add how much they rose in September. And October. And November. And every month until this past July.

In other words? “A year-year indicator is reflective of inflation over the past year,” said Laura Veldkamp, an economics professor at Columbia.

That number can be helpful if you want to filter out temporary changes in inflation that happen month-to-month, she said.

“Some things are on sale, and some things have a little temporary daily spike on the day we measure them,” said Veldkamp. “So to smooth out some of that noise, we typically average.”

But the problem with averaging up the last 12 months of inflation data is that the economy looked very different 12 months ago.

“The more months you add, the smoother it gets, but also the more stale it gets,” said Jason Furman, an economics professor at Harvard.

Inflation has been slowing down over the last several months, so a number that looks at 12 months of inflation data isn’t all that useful.

“In an economy that’s changing as quickly as it has been on the inflation side, I think that staleness is just not worth it,” Furman said.

There is a compromise between the year-on-year inflation data and the month-to-month figures: “My favorite is the quarter-on-quarter, which is something in between,” said Menzie Chinn, an economics professor at the University of Wisconsin.

He argues that looking at inflation in three-month chunks keeps the data fresh and free of any one-off distractions — like a spike in broccoli prices.

“If it’s truly a one-off event, then that’s going to dissipate the next month,” Chinn said.

And that, he added, can give him a better idea of where inflation is headed.

Correction (Aug. 9, 2023): A previous version of this story misstated the university where Menzie Chinn works.

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