The Consumer Price Index (CPI) is the most widely used metric for consumer inflation changes over time and utilizes data based on consumer buying habits from a broad sample set of the population. Published each month by the Bureau of Labor Statistics (BLS), the CPI provides analysts and consumers pertinent economic information directly related to inflation movement based on government statistics and price trends at the national and regional levels. To understand data published on the CPI and the effect of inflation on the economy, it is necessary to understand how the statistics are adjusted and why.
- The Consumer Price Index (CPI) measures the change in the value of a basket of goods over periods of time due to inflation.
- The CPI is an important tool used by economists to understand inflation in the economy and how to manage and make adjustments to control inflation.
- Seasonal adjustments are made to the data used in calculating the CPI in order to remove the effects of seasonality on price information and to achieve a clearer picture of price movements without anomalies.
- Seasonally adjusted data is used as a baseline for the creation or revision of economic policy and high-level economic research.
Seasonally Adjusted Data
The price-change data used for the CPI is gathered and published each month as an economic time series. Because of the frequency of its analysis, certain adjustments must be made to the data so it can be analyzed accurately over longer periods of time. The CPI, along with other broad measures of economic change, utilizes a process known as seasonal adjustment to factor out seasonal effects on the price data gathered each month to gauge increases or decreases to inflation. This provides users with a more accurate depiction of price movements void of anomalies that can occur during specific seasons.
For instance, price changes in CPI categories such as apparel or transportation may occur at an increased rate in the months leading up to a holiday due to greater consumer demand, although they may have little or no change throughout the rest of the year. Similarly, a reduction in housing prices may occur during colder months, which may not be the case during warmer months of the year.
Though the CPI adjusts for seasonality it does not adjust for substitutions; when consumers purchase cheaper substitutes when the price of the main good or service increases. This is a limitation of the CPI.
Some seasonal effects are so large that they hide other price data characteristics that provide a more accurate analysis of changes in consumer buying habits. As such, the adjustment of information for seasonal effects is done in an effort to enhance the presentation and ultimate use of data for the long-term. To determine the adjustment, seasonal factors calculated by complex software programs are divided into the economic time series data for any given month.
Who Should Use Adjusted Data?
The CPI data published on a broader national level is always adjusted for seasonal effects and most commonly used by those who are interested in analyzing price change trends on a grand scale. Seasonally adjusted data is used as a baseline for the creation or revision of economic policy and high-level economic research. Conversely, when CPI data is used for the purpose of escalation agreements, unadjusted data should be used instead of seasonally adjusted information. Unadjusted data allows an analyst to measure true price changes month-to-month and is used extensively in collective bargaining contracts and pension plan calculations.
The Bottom Line
The CPI is a tool that economists, analysts, and governments use to monitor the change in prices due to inflation or deflation. The information allows for the adjustment or revision of economic policy. To make sure that the most accurate data is used, the price information is seasonally adjusted to remove price drops or increases due to seasonal factors.
Even with seasonal adjustment applied, the CPI is not a perfect tool in determining shifts in consumer buying habits. It is, however, a valuable measure of broad changes in inflation that can affect long-term economic policy and consumer behavior.