In
actuality, where is inflation headed? This real-time inflation indicator helps
traders and economists stay ahead of the curve.
If
you want to know how much a publicly traded company is worth at any given time,
all you have to do is look up its market cap, which updates in real time during
trading hours. But if you want to know how fast prices are rising in the US,
you get two official updates a month — the Consumer Price Index and the
Personal Consumption Expenditures price index. Both come with a lag, can be
revised several months later and can even be indefinitely delayed in the event
of a government shutdown, as was almost the case with September’s inflation
data.
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Despite
these shortcomings, officials at the Federal Reserve rely on these government
reports to help make crucial monetary policy decisions that directly influence
the interest rates you pay on your mortgage and other kinds of debt. The inflation rates the government arrives at also impacts how much you
receive in Social Security benefits and likely is a factor in determining your
pay. But a novel real-time inflation gauge called Truflation is trying to fix
some of the issues with government inflation data that has long been considered
the gold standard. While it’s valuable to have regularly updated inflation
data, Truflation doesn’t have as much access to certain categories the
government data tracks, namely education and health care prices, two big
expenses for many Americans. The government also has a much longer history of
producing inflation reports with extremely thorough standards.
How
it works
Unlike
PCE and CPI, Truflation arrives at a new inflation rate on a near-daily basis,
drawing from over 60 different data sources that provide three unique prices
across more than 18 million goods and services. Some of the data providers
include Amazon, Walmart, Nielsen, Hilton and Zillow. While the Bureau of
Labor Statistics, the division of the Labor Department that produces monthly
CPI reports, enlists a team of people to either physically go to businesses,
call them up or scan websites to collect pricing data for 80,000 goods and
services across the country, Truflation pays for some of the data. Over
time, more providers have been sharing data for free because they recognize
that having it incorporated into the model will give them more updated and
accurate information on how competitive their pricing is, Stefan Rust, CEO and
founder of Truflation, told CNN.
That
data goes through a rigorous process incorporating blockchain technology to
verify its authenticity, which Truflation outlines in its public 20-page
methodology. Like
PCE and CPI, Truflation assigns relative importance values to categories to
mirror how an average consumer’s income is allocated. For most consumers,
housing accounts for the majority of their spending, and is therefore assigned
a greater weight than, for instance, clothing. That’s why small increases in
the cost of housing can end up having big impacts on the overall inflation
rate.
Truflation
uses the same process the government does to calculate relative importance, but
it uses some different data to determine how consumers allocate their income.
That accounts for some of the variation between the government’s inflation data
and Truflation’s. Another discrepancy is that Truflation’s data is not
seasonally adjusted, whereas the government’s monthly data is. That means that
an increase in utility prices during the summer when it’s typically more
expensive to cool your home would show up more in Truflation’s data than the
government’s.
As of
Wednesday, Truflation put the nation’s annual inflation rate at 2.23%, just
inches away from the Fed’s 2% target. In contrast, May’s CPI report released
Wednesday morning arrived at a 3.3% inflation rate, matching precisely what
Truflation predicted the gauge would come in at based on its data. Truflation
is able to predict what government inflation reports will show by adjusting
their data to when the government goes out and collects its own pricing data to
form its monthly reports.
How
Truflation data is being used
Wall
Street traders were the first group drawn to Truflation, Rust said. “They
wanted the data to help them calculate where they felt, based on our data, the
government BLS numbers would come out on.” Danielle DiMartino Booth, who
advised Richard Fisher when he was the president of the Dallas Fed and who is
now CEO and chief strategist at QI Research, said she uses Truflation “to
identify where price pressures are cropping up” on a daily basis. That gives
her a “better feel” of what’s happening on the ground versus the government’s
data, Booth told CNN. While Fed officials have taken a greater interest in
analyzing economic data from non-government sources to help shape their views
on the economy, it remains to be seen if and how they’re using Truflation data.
But it’s on their radar, said Rust, who says he has met with researchers from
the New York and Dallas Fed.
