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."
Reference: Fact Sheet on Seasonal Adjustment in the CPI
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.