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Inflation Data In The Information Age

Posted on March 24, 2015

"There's still a Cold War element to our statistics." - Alan Krueger, former White House economist 

2015-03-24_information_age.jpgThe sheer amount of information available to us in this day and age is absolutely mind-boggling. With the evolution of the internet and mobile devices, we now have more information available at our fingertips (literally) than what was consumed by all of humanity prior to the information age. In our line of work it has become incredibly important to sift through the oceans of data to identify what’s worth paying attention to and what should be ignored. This discipline is so important we dedicated a four-part series to the dangers of paying attention to the news back in June of 2014.

For us, inflation data certainly falls into the category of “worth paying attention to”. Indeed, there are few economic data series that are more relevant to policy making (and thus financial markets) in the world today. The primary reason for this is that in many economically significant regions price trends are either uncomfortably low or even teetering over the edge of deflation. This is the case in most of the developed world, i.e. the US, Europe and Japan. Regardless of what is happening abroad, the US Federal Reserve will be heavily influenced by trends in domestic inflation, and global capital markets will be heavily influenced by the US Federal Reserve.

There are a number of ways to quantify and measure inflation, but one metric that has caught our eye recently is the State Street PriceStats Inflation Index. This index is based on a research program out of the MIT Sloan School of Management called the “Billion Prices Project”. What makes PriceStats unique is that it provides a daily measure of inflation by continuously scraping the internet for price data and updating the index in real time. According to the Huffington Post, the analysis currently covers over 70 countries and measures price fluctuations across over 300 retailers and 5 million individual items.

The timeliness of the PriceStats data compares quite favorably when stacked up to the most widely followed inflation measure, the Consumer Price Index (CPI). The CPI is published by the Bureau of Labor Statistics with nearly a one-month lag which feels like an eternity in the modern era of immediate information gratification. As cited in the quote from Alan Krueger at the beginning of this article, the government’s process of delivering inflation data to the market really hasn’t received an upgrade since the Cold War era.

The PriceStats index has been receiving a lot of attention lately for the strong reversal in its month-over-month rate of change. Notice the steady decline in the red line in the chart below, followed by the sharp rebound in recent weeks. Many journalists have pointed to this chart as evidence that inflation is finally starting to heat up, but we think this argument needs to be taken with a grain of salt given the clear impact from the single input of gasoline prices on the data. The pink line, which removes gasoline prices from the calculation, tells a much different story.

2015-03-24_pricestats_mom.jpg

While the chart above is plotting month-over-month percentage changes in the index, this next chart is taking a longer term view by plotting the year-over-year percentage changes. When looking at the data in this light there does seem to be an emerging uptrend in core inflation over the past six to nine months. (Note that in the chart below the core index is actually plotted in red.)

2015-03-24_pricestats_yoy.jpg

What’s really interesting about this is that this potential uptick in core inflation has gone relatively unnoticed by virtue of the fact that it has not been confirmed by the widely-followed Core CPI Index. In the chart below you’ll notice that the blue line (Core CPI) has actually been trending lower even as the red line (Core PriceStats) has been recovering. Given the propensity of the PriceStats data to lead the CPI data in certain periods in the past, this divergence could be signaling that we will begin to see Core CPI rise in the coming months as well.

2015-03-24_pricestats_yoy_vs_core_cpi.jpg

Just this morning, as we were penning this Insight, the Bureau of Labor Statistics released their February 2015 numbers for the CPI index. Headline CPI increased 0.2% month-over-month, marking its first monthly increase since October. Core CPI, meanwhile, also increased 0.2%, outpacing economists’ expectations of a 0.1% rise. This data seems to be in line with what was foreshadowed by the PriceStats Index - an incremental uptick in inflation in February.

It will be interesting to see if the CPI numbers do in fact continue to follow in the footsteps of the PriceStats data in the coming months. The more often this happens, the more relevant and closely-watched this daily index will become and the less relevant the delayed CPI data will be. While it’s a long shot to think that the institution of government statistics would ever be fully displaced, we think this is but one chapter in what will be a long saga of the private and academic “big data” industry making improvements on the generation and dissemination of all types of data. For inflation statistics, it might finally be time to leave the Cold War era behind and join the Information Age.


david_headshot_bw.jpgAuthor David Houle, CFA is a founding member of Season Investments. He serves as the firm's Chief Compliance Officer as well as sitting on the investment committee overseeing the management of client assets. David spent nearly ten years in various roles primarily managing individual client assets prior to co-founding Season Investments. David graduated with a degree in Finance from Colorado University in Colorado Springs in 2003 and earned the Chartered Financial Analyst (CFA) designation in 2006. David and his wife Mandy have three children and spend most of their free time with friends and family.


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