Inflation: Rates, Levels, and Time Periods
You might have seen that the inflation rate rose from the 6.8 percent reported in early December to 7 percent reported today. It’s important to understand what exactly is being reported. The reporters don’t necessarily do a terrible job, but readers often misunderstand.
What is being measured in each case is the inflation rate over a 12-month period. Inflation between November 2020 and November 2021, which is what was reported in December, was 6.8 percent. Inflation between December 2020 and December 2021, which is what was reported this morning, was 7.0 percent.
So it looks as if inflation is rising. Is it? No. The reason is that to know if inflation is rising or falling, we need to look at the latest data. So we need to compare the inflation rate in December with the inflation rate in November. In November, the Consumer Price Index rose by 0.8 percent, which implies an annualized inflation rate of 9.6 percent. But in December the CPI rose by 0.5 percent, which implies an annualized inflation rate of 6.0 percent. So inflation actually fell.
One of the most careless statements I’ve seen on-line, and it’s in the headline of the news story referenced above, is that inflation rose by 7 percent. No. Prices over the last year rose by 7 percent. If you want to stick with annual, then to be correct, you would say that the inflation rate rose by 0.2 percent. If you want to report as accurately as possible what happened to inflation this last month, you would say that the monthly inflation rate fell by 0.3 percentage points and that the annualized inflation rate fell by 3.6 percentage points.
One of the most important things I learned from Ben Klein in his Ph.D. monetary theory course at UCLA was always to distinguish between rates and levels. Levels tell us that prices rose. Rates tell us that the inflation rate fell.
This article appeared firshere