Lose Yourself in the Inflation Data

Inflation is a touchy subject, and given there are many ways to analyze it, investors should take note of the nuances that exist within the data.

It's difficult to find a subject that has captured the zeitgeist of the post-pandemic world more than inflation. For valid reasons, discussion about the rise in prices is all around us—whether it stems from Federal Reserve officials setting monetary policy, consumers facing strains at stores and the gas pump, or businesses boosting workers' wages.

This year, though, the conversation around inflation has demonstrably shifted. The pace of price increases has eased considerably relative to a year ago; most recently, the October consumer price index (CPI) report helped solidify some strategists' and analysts' conviction that the Fed is done hiking interest rates. Not only that, it has pushed many Fed watchers (and market participants) to start expecting rate cuts by as early as March 2024.

Inflation is a touchy subject, not least because there are many ways to frame and/or calculate it. If the pandemic-related surge taught us anything, it's that inflation is truly in the eye of the beholder. So, let's take a look at the many different ways one can measure the change in prices. Given this is a rather lengthy report, I'll state my conclusion early on: You can literally paint whatever picture you want with any subset of inflation metrics.

CPI of the beholder

Starting with the most widely followed metric—CPI—the chart below shows one of the most common ways to look at inflation: the year-over-year percentage change in the index. As you can see, we've made remarkable progress over the past year after seeing a spike to the fastest inflation rate since the 1980s. While the trend has eased this year, CPI and core CPI (which strips out food and energy) are still hovering at rates that are likely too fast for the Fed to declare victory.

In year-over-year terms, much progress