Previewing Friday's Revisions Of CPI Data, And How It Will Affect The Market

While not nearly as important as next Tuesday's CPI report, tomorrow the Bureau of Labor Statistics (BLS) will update the seasonal factors used to calculate seasonally adjusted (SA) indices for price series included in the CPI. This process can also result in revisions to the seasonally adjusted indices (NSA) for the previous five years. Importantly, the not-seasonally adjusted index is unaffected by these revisions. The updated seasonal factors are set to be published early on February 9.

Whereas normally the annual CPI revisions are an irrelevant piece of econometrics, which few pay attention to, in a world where the fate of US monetary policy is highly contingent on whether the Fed has managed to contain the unprecedented explosion in prices and where various government agencies are doing everything in their power to paint the most desirable economic picture even if it does not correspond to reality, this year's report is especially important because as Federal Reserve Governor Christopher Waller said on Jan 16, “one piece of data I will be watching closely is the scheduled revisions to CPI inflation due next month. Recall that a year ago, when it looked like inflation was coming down quickly, the annual update to the seasonal factors erased those gains.” And indeed, the 3-month annualized rate in December 2022 was revised up from 3.1% to 4.3%. This resulted in a shift in tone from the Fed and markets pricing in a firmer path for Fed funds.

So is this year going to be a repeat of last year's revisions fiasco which skewered market hopes for a rate cut? According to BofA's chief economist Michael Gapen the answer is no, because "last year was an outlier."