The Economy

Inflation In First Half of 2015 Lower Than Reported

Reports of the growth in consumer price inflation were somewhat overstated in the first two quarters, say San Francisco Fed reasearchers.
Katie Kuehner-HebertAugust 24, 2015
Inflation In First Half of 2015 Lower Than Reported

Reported inflation was probably overstated so far this year, but “residual seasonality” likely won’t cause the Federal Reserve to begin raising interest rates prematurely, so say researchers at the Federal Reserve Bank of San Francisco.

Because of residual seasonality — insufficient adjustment of the numbers to smooth out seasonal swings – core PCE inflation was probably overstated by 0.3 and 0.2 percentage points in the first and second quarters of the year, respectively, the researchers said in an analysis released Monday.

The application of a second round of seasonal adjustment implies inflation of 1.2% in the first quarter and 1.5% in the second quarter, markedly lower than the inflation rates in the published data. Conversely, later this year, published inflation data are projected to be understated by the same amount.

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A Reuters article said that the analysis could cast doubt on whether Fed policymakers can be confident that inflation is headed back to their 2-percent goal, the hurdle they have set for raising interest rates as soon as next month.

However, the researchers wrote that because the policymakers take into account their goals of both full employment and stable prices when setting policy, the overstatement of inflation in the reported data is unlikely to spur them into raising rates too soon.

“Policymakers realize that any single piece of data, even a comprehensive measure like GDP, has to be taken with a grain of salt,” the researchers wrote. “Because of this, they are unlikely to be misled by the transitory statistical noise arising from residual seasonality.”

The issue of residual seasonality has heretofore focused on gross domestic product growth. According to the San Francisco Fed researchers, “since 1990, average real GDP growth has been significantly slower during the first three months of each year than in the subsequent quarters. Such ‘residual seasonality’ in the published seasonally adjusted real GDP data should be taken into account when assessing the state of the economy.”

“The price index for personal consumption expenditures (PCE) is also seasonally adjusted by the [Bureau of Economic Analysis] using the same methodology that it uses to construct GDP,” the researchers continued. “As a result, it would not be surprising if the PCE price data were also plagued by residual seasonality.”

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