CPI Seasonal Adjustments

Every month, around the 15th, a government agency Bureau of Labor Statistics (BLS) announces the Consumer Price Index for the previous month. The inflation numbers for May was announced last week. A typical news report went like this:

Consumer prices rose 0.2% in May, the lowest in six months. Excluding the volatile food and energy, the core inflation was 0.3%.

I still own some TIPS maturing in 2028. Inflation in May will be used to adjust their principal values in July. Does that mean the principal values of my TIPS bonds will go up by 0.2% next month, at an annualized rate of 2.4%?

No. The principal values of my TIPS bonds will go up by 0.5% in July. That’s an annualized rate of 6%.

Why? Because the news headlines report the seasonally adjusted inflation numbers, but TIPS principal adjustments use the not seasonally adjusted inflation numbers.

Here’s a chart of monthly seasonally adjusted inflation between January 2010 and May 2011:

Inflation in May was indeed the lowest in six months if you look at the seasonally adjusted numbers.

Here’s a chart of monthly not seasonally adjusted inflation in the same period.

The not seasonally adjusted number in May was down from that in March but still quite high.

Putting the two charts together:

In the last 18 months, the seasonal adjustments adjusted the numbers down in the first half of the year and up in the second half.

Why do they do these seasonal adjustments? BLS says

“Changing climactic conditions, production cycles, model changeovers, holidays, and sales can cause seasonal variation in prices. For example, oranges can be purchased year-round, but prices are significantly higher in the summer months when the major sources of supply are between harvests.”

Inflation protected bonds performed better than nominal bonds so far in 2011. High, not seasonally adjusted CPI numbers played a role. TIPS gained 3% in (nominal) principal value from inflation adjustment in the last six months.

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Comments

  1. RICH says

    tfb,

    what are your thots on the upcomin 30 yr tip auction?

    imo, long term rates appear to be falling again so these tips might appreciate several percent in the next 6-12 months. they might be worth selling for a short term gain.

  2. Harry Sit says

    @RICH – I don’t and can’t speculate where the rates are going in the next 6-12 months. I didn’t buy the 30-year TIPS when it was auctioned in February because the maturity was too long for me. As of a month ago, investors who bought it in February had a 13% gain in three months. It shows you just a small change in rates can have a large effect on this bond, because it’s a 30-year.

    Will it repeat? If you are sure long term rates will be falling, this would be a good one to speculate on because if you are right you will have a good gain. If you are wrong though, you will also have a large loss. Buy it only if you are OK with holding it. Don’t speculate.

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