Yahoo Finance

Key Takeaways

• Hotter-than-expected inflation in January may be partly due to a data quirk resulting from the Bureau of Labor Statistics adjusting the inflation index for seasonal patterns.
  

• While "residual seasonality" may not explain away the unexpectedly high rate of inflation in January, it could mean it wasn't as bad as it seemed at first.
  

• Regardless of seasonal adjustment issues, inflation might be headed upward because of President Donald Trump's imposition of tariffs on foreign trading partners.
  

Inflation ran hotter than forecasters expected in January, but a quirk of the data involving seasonal adjustment means some economists have stopped short of declaring that pandemic-era high inflation has reignited. 

According to the Consumer Price Index, the cost of living rose unexpectedly fast in January, hitting a 3% annual increase for the first time in six months. It was the fourth increase to the annual rate in as many months, raising alarm bells that the post-pandemic burst of inflation—which last year seemed headed down to a comfortable 2% annual rate—is rearing its ugly head again.

But at least some of the resurgent inflation could be a mirage of the data.

Seasonal Adjustments Could Account For Rise

That's because the Bureau of Labor Statistics calculates inflation not just based on how much prices rose but also has to account for the fact that prices follow seasonal patterns. Just looking at price tags, prices rose in January, but many companies typically raise prices every January no matter what happens in the economy.

The real question for determining inflation's trajectory is how much prices rose outside the norm. The Bureau of Labor Statistics adjusts for that when calculating the index.

Moreover, the bureau is constantly tweaking its adjustments. Every January, the bureau recalculates its seasonal adjustments based on the previous year's data. That adjustment pushed January's inflation rate up slightly this year, leading some economists to take the new inflation figures with a grain of salt.

Some experts also suspect that the bureau's methods have not stamped flat all the seasonal up-and-down price swings, meaning there's still some "residual seasonality" left in the data.

"The substantial 0.45% rise in the January core CPI largely is due to seasonal adjustment adapting too slowly for the great post-pandemic clustering of annual price rises in the first month of the year," Samuel Tombs, chief U.S. economist at Pantheon Macroeconomics, wrote in a commentary.

"The revised seasonal adjustments and relative importance weights going back five years could be exacerbating the higher print in January, and we expect to see a moderation in inflation readings going forward," Kathy Bostjancic, chief economist at Nationwide, wrote in a commentary.