The markets will keep a keen eye on Friday’s annual revisions to the seasonal adjustment factors for U.S. consumer price data. The annual revisions to the CPI are usually a non-event. However, the markets were spooked last year after large revisions to the seasonal adjustment factors sowed doubts about overall progress on inflation.
The mention of the annual revisions to the U.S. consumer price data last month in a speech by Fed Governor Waller has ramped up the importance of Friday’s revisions. Waller said, “Recall a year ago when it looked like inflation was coming down quickly; the annual update to the seasonal factors erased those gains. My hope is that the revisions on February 9 confirm the progress we have seen, but good monetary policy is based on data and not on hope.”
The U.S. Bureau of Labor Statistics (BLS) regularly adjusts monthly CPI data to remove seasonal factors that affect the numbers. For example, the estimated impact of harvests or trends on holiday shopping can affect monthly prices. Smoothing through these one-time factors with seasonal adjustments makes it possible to compare inflation across months within the same year.
Revisions made by the BLS last year caught the markets by surprise. Initial price readings had shown consumer prices excluding food and energy, or core prices, had risen +3.1% on an annualized basis in the final three months of 2022, down from +8% in the same period in 2021. However, the positive development was a head fake after the 3.1% gain was revised upward to 4.3%. Then, the Jan 2023 core CPI report, released four days later, rose at a +5.1% pace, further dampening the outlook that inflation was falling.
Some analysts don’t believe Friday’s U.S. CPI revisions will surprise the markets. Morgan Stanley said, “Last year’s CPI revisions were an outlier, and from a purely statistical standpoint, the chances of seeing another outlier in the upcoming revisions are low.” Also, Bank of America said, “We do not expect a repeat of last year,” and we don’t think the revisions will affect the outlook for monetary policy this time around.
Nevertheless, the markets will be watching the CPI revisions closely for any shift in the inflation outlook that could affect the timing of expected Fed rate-cuts later this year, which is currently the number one factor moving the stock and bond markets.
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On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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