US Consumer Price Index Revision Rattles Wall Street and Washington Amid Rising Debt
© AP Photo / Susan WalshIn this Dec. 1, 2020, file photo, Chairman of the Federal Reserve Jerome Powell speaks during a Senate Banking Committee hearing on Capitol Hill in Washington.
© AP Photo / Susan Walsh
Federal Reserve officials are eager to prove they have brought inflation under control before they lower interest rates. The possibility of a revision this week has made policymakers and investors nervous.
Apprehension grips Washington and Wall Street economists regarding the new consumer price index (CPI) revisions slated for Friday morning.
Usually, these changes are small and negligible. But this time, they might have an effect US inflation.
The US economy is burdened with a whopping national debt, projected to soar to a record 116 percent of its gross domestic product (GDP) before then end of 2024 and keep growing, a new Budget and Economic Outlook report released by the Congressional Budget Office (CBO) on Wednesday last week stated.
"Debt held by the public increases from 99 percent of GDP at the end of 2024 to 116 percent of GDP - the highest level ever recorded - by the end of 2034. After 2034, debt would continue to grow if current laws generally remained unchanged," the report said.
21 November 2023, 21:09 GMT
Maya MacGuineas, President of the Committee for a Responsible Federal Budget, said the highway trust funds and Social Security retirement will run out of money and need significant cuts within the next ten years. She also noted that interest on the national debt has surpassed the country’s federal spending on children or Medicaid and is expected to be more than spending on national defense in 2025, hitting $1 trillion in the next two years.
What is CPI?
The Consumer Price Index (CPI) is one of two main benchmarks for tracking the changing prices of goods and services. It gauges inflation, giving policymakers, financial experts, businesses and everyday shoppers insights into how prices change over time. The Federal Reserve uses CPI to fine-tune its monetary policies. It helps companies and consumers to make smart financial choices.
Why Seasonally Revise CPI?
The US Bureau of Labor Statistics modifies monthly CPI data for seasonal factors like harvests or holiday shopping patterns. This adjustment helps compare inflation between different months in a year. However, quantifying seasonal trends needs updates to match changes in climate, model modifications, production cycles, and other factors.
Christopher Waller, a member of the Board of Governors of the US federal Reserve System, drew attention to this on January 16, leading to several research publications on the issue from investment banks.
“Recall that 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 confirm the progress we have seen, but good policy is based on data and not hope," Waller remarked in his speech.
Last year the BLS made changes that surprised the markets. Earlier price analysis showed inflation, not counting food and energy, running to 3.1 percent in the last three months of 2022, down from 8 percent in the same period in 2021.
But it was later revealed those figures were false when the 3.1 percent was adjusted upward by 4.3 percent.
Last year's January CPI data showed a 5.1 percent increase in prices causing market jitters. Close attention will be paid to Friday’s release of new report, even though some economists are trying to downplay its significance.
27 December 2023, 20:06 GMT