Opinion from a Libertarian ViewPoint

“Transitory” No Longer: Double-Digit Inflation Is Already Here!

Posted by M. C. on July 23, 2022

Joseph T. Salerno

The Bureau of Labor Statistics (BLS) and the media reported the inflation rate—that is, the Consumer Price Index‘s rate of increase—to be 1.3 percent for June 2022 and 9.1 percent year over year (for the last twelve months). This shocked markets and investors because economists’ median forecast had been 1.1 percent for June and 8.8 percent year over year. This shock would have been much greater, however, had the annual inflation rate been reported as the CPI’s compounded annual rate of change for the month or quarter. This calculation method would have revealed the stark reality that double-digit inflation is not just a specter looming on the horizon but is here right now. According to computations I made using the interactive economic data website (FRED) of the Federal Reserve Bank of St. Louis (FRB of St. Louis), the annualized inflation rate for June 2022 was 17.1 percent, while for the second quarter of 2022, the rate was 10.5 percent.

Let us compare these two methods of calculating the annual inflation rate using the figures in the preceding paragraph. According to the BLS, CPI changes are “a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.” To say that the monthly inflation rate is 1.3 percent, then, means that the CPI increased by 1.3 percent from the month before. Similarly, a year-over-year inflation rate of 9.1 percent means that the CPI rose by 9.1 percent over the past twelve months. This way of calculating the annual inflation rate is backward looking, because the most recent monthly rate is heavily outweighed by the previous eleven months’ rates.

In contrast, calculating the annual inflation rate by compounding and annualizing the most recent monthly or quarterly rate of change in the CPI gives a better idea of what inflation currently is and how it may be trending. For instance, the 17.1 percent compounded annual inflation rate reported above is derived by assuming that the 1.3 percent monthly rate of change for June continues unchanged for the next eleven months. If the monthly inflation rates appear to be volatile, the compounded annual inflation rate for the last three months may also be computed in a similar manner. As noted above, the compounded annual inflation rate for April 2020 to June 2022 was 10.5 percent. In any case, this computation method is forward looking and more useful for analyzing the implications of fresh inflation data and recent events’ likely impact on the inflation trend.

Now this may seem like merely a technical matter, but some forms of data presentation are clearer and more useful than others, especially during a time of rapid inflation. Presenting the inflation rate as a year-over-year calculation obscures shorter-term but substantial fluctuations that may occur and what they portend for the future, especially if inflationary expectations are beginning to become unhinged. Furthermore, presenting inflation data in annualized form permits clear and easy comparison of inflation rates in periods of varying length. For example, up until January 1997, the FRB of St. Louis, which for many years was the most “monetarist” and inflation conscious of the regional FRBs, displayed inflation rates with “growth triangle” in its monthly release (suspended in March 2015), National Economic Trends (NET). The triangle, which resembles an intercity mileage table on a highway map, consisted of compounded annual inflation rates for each of the nineteen immediately preceding months and for all series of consecutive months in that range, totaling 190 rates in all.\

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