Opinion: Everyone looks at CPI through the wrong lens. The best measure shows that inflation has fallen to the Federal Reserve’s target level in the past three months.

This is the big question facing policy makers, investors, and consumers.

Unfortunately, the way we talk about Inflation figures Thursday released – can confuse as much as it can explain. If we focus our attention on how much inflation we have already endured, we may lose clues about how much inflation we still have to put up with, which is the more important question.

Instead of focusing on the here and now, most reports put the annual inflation rate in the headline.

Not to pick anyone, but here’s how New York times I reported Thursday’s report on Consumer Price Index: “Consumer prices rose 8.2 percent in the year to September, in a report that dashes hopes that US inflation may slow.”

This is not wrong, but it is seriously misleading. I’m going to show you a more useful way to think about numbers.

The Fed has hit its 2% target over the past three months, but of course the Fed is concerned that inflation could accelerate from here, especially in the all-important shelter category, where hot inflation for the next year or so is contained in Kick. .

Understanding economic data is often a matter of finding the right context, which means that the first thing you should do is ask yourself how you want to benefit from the data. There are several valid ways to display data, but some are better than others at answering specific questions.

What is long term inflation?

For example, if we want to find out how much inflation we have actually endured, it might be better to look at the annual increase in CPI. (The same reasoning in this column applies to the Fed’s preferred metric, the personal consumption expenditures price index.) We’ll compare current prices with prices a year ago. This may be the most popular way of reporting CPI in the media at the moment, as it puts the intensity and persistence of inflation into a perspective that readers can relate to.

This method answers the question: How far have we come?

In this case, we will find that consumer prices have increased by 8.2% since September 2021. This is very high inflation, but it is lower than the 9% year-over-year recorded in June, which was the highest level in 40 years.

Market Watch

If we only look at the annual increase in CPI, we might agree with Federal Reserve Assessment That there was no “measurable decline” in bringing inflation down to the 2% target.

The annual perspective is good for seeing how far we’ve come, but it’s not so good at predicting where inflation is heading, because it’s basically a retrograde metric. It gives equal weight to inflation in September 2021 and inflation in September 2022. However, the rate of inflation from a year ago has little effect on the rate of inflation that will move in the future.

The best indicator of the inflation rate for this month is the inflation in the previous month. The CPI is dominated by the so-called fixed prices, which do not change much. Inflation is very persistent from month to month.

What is inflation doing lately?

So if we want to know how hot inflation has been lately, we’ll look at a shorter period of time, say one month. The media frequently report the CPI in this way, using the month-to-month percentage change rather than the annual rate.

In this case, the data may suggest that the CPI rose 0.4% in September after a 0.1% increase in August.

Market Watch

But using the monthly change percentage seems like a strange choice when we use the annual rates of annual earnings. It’s like talking about miles per hour and then converting to feet per second.

That is why many analysts prefer to convert the monthly change into an annual rate so that it can be compared to the annual inflation rate. The data shows that the CPI rose at an annualized rate of 4.7% in September versus 17.1% in June, which was a 17-year high.

Market Watch

The monthly data seems very annoying. So let’s find the primary trend by taking an average of three months to smooth out the bumps. In this case, the data shows that CPI rose at a 2% annual rate from July through September, down from 11% in June and 11.3% in March, a 41-year high.

This perspective answers the question: What happens to inflation yesterday, today, and tomorrow?

If we look at the smooth three-month annual rate, we may disagree with the Fed on how much progress it has made. Going from 11.3% in March when the Fed started raising rates to 2% now is nothing. Sounds – would you dare say that? – progress.

The Fed has hit its 2% target over the past three months, but of course the Fed is concerned that inflation could accelerate from here, especially in the all-important shelter category, where inflation is hot for the next year or so. Baked in a cake.

What question do we want to answer?

All of these CPI measures are correct; They just came from a different perspective. Which one should we pay attention to? The one who says no tangible progress has been made, or who says some progress has been made but not enough? If we have a bias towards the story we want to tell, the answer is clear.

But if we want an honest arithmetic, we’ll use the perspective that answers the question we’re asking and let the chips fall where they could. (What you don’t do is start with the answer you want and then work backwards.)

That’s why I think the best way to think about the inflation we’re seeing right now – and which is likely to continue into the near future – is to look at the three-month seasonally adjusted, harmonized annual rate.

This perspective is more honest than the other method, and it’s also more optimistic.

Rex Nutting is a columnist for MarketWatch and has been writing about the Federal Reserve and the economy for over 25 years.

More opinions on inflation by Rex Notting

The Fed risks driving the economy into a pit because it doesn’t look at where inflation is heading

The Fed has won a big fight against inflation but he doesn’t believe it because the data is so flawed

Americans feel poor for a good reason: family wealth is torn apart by inflation and high interest rates

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