Food inflation at an inflection point?
Don't be fooled by seasonal adjustment
As we head into the holiday weekend, a few thoughts on Food.
Seasonal adjustment plays a major role in '“Food-at-home” CPIs, one that may introduce more distortions than it filters out over the near term given the huge Spring price swings over the past few years.
For example, across many seasonally-adjusted food CPIs, it looks like we’re hitting a cyclical inflection point with prices coming down significantly in April and May, e.g. in Beef Steaks:
But then one takes a look at the NSA version and the picture looks more nuanced, with the series hovering around 0 until late May.
When this process is repeated across items, a seemingly modest seasonal adjustment has the potential to shift the narrative on whether consumer prices are peaking.
The idea behind seasonal adjustment is to filter a time series to eliminate seasonal noise so one can focus on its “true” cyclical variation.
A thoughtful article in May’s Monthly Labor Review shows how 2020’s seesawing food prices disrupted the BLS’s seasonal factor calculations from April through June by obscuring the ‘true’ seasonality of item-level CPIs. The authors argue that the COVID’s extreme price movements actually inhibited the typical seasonal signal observed in Food CPIs.
The magnitude of variation introduced by seasonal adjustment factors can dwarf the variation of the original series in normal times. It definitely can disrupt the time-series properties of CPIs and introduce spurious momentum when derived from data from the pandemic’s onset in 2020, and inflation’s first surge, in 2021, even after BLS interventions to “fix” these prices. Caution is warranted. Apparent inflection points may just be figments of a statistical process doing the best it can in the face of extreme, (hopefully!) once-in-a-generation relative price movements.
Food away from home
On the services side, the BLS does not seasonally adjust most “Food away from home” ELIs. The ELI with the largest weight in this category is “Limited service meals and snacks”, defined by the BLS as “Food and non-alcoholic beverages purchased at establishments where patrons generally order and pay at the register before eating.” It includes take-out, delivery, or eating on the premises.
Dotdat’s real-time CPI matches the official data fairly well over the past few months and, as shown in the figure below, seems range bound around about a 0.1 percent monthly inflation rate, with May (as of May 23) looking like March’s slightly negative print of -0.1 percent.
“Full service meals” is the other ELI with a significant weight in the “Food away from home” category, and while its official CPI has risen over the past few months, its real-time CPI has been declining. It will be interesting to see which way this resolves. Full-service transactions may not be measured well via online prices, given that they include many discretionary items—specials, tips, etc. That said, posted menu prices should have some correlation with these more variable costs over time.
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