Monday, July 7, 2014

Seasonality in Monthly Inflation Rate

The price you are buying a good or a service depends on the moment of the year you are shopping. The good you buy at its regular price at the beginning of a season may come with a half price deal at the end of that season when retailers are clearing their inventories.

In a recent post (here), I have shown the contribution of seasonal components to the fluctuations observed in the monthly inflation rate in Canada, i.e., in the month to month percentage change in prices. Prices, in Canada, tend to decrease in December or to remain stable in January and June mainly because the seasonal variations in the data offset their long-run growth components. Is this seasonal pattern specific to Canada or common to some industrialized economies?  Let us look at monthly inflation rates for the United States (US) and the United Kingdom (UK). 

Inflation Rate Based on the Price Index of all Items less Food and Energy, Unadjusted seasonally, the United States, 1984:M2-2014:M5, the United Kingdom, 1984:M2-2013:M12, Data Source: Federal Reserve Bank of St Louis
Figure: Inflation Rate Based on the Price Index of all Items less Food and Energy, Unadjusted Seasonally, the United States, 1984:M2-2014:M5, the United Kingdom, 1984:M2-2013:M12, Data Source: Federal Reserve Bank of St Louis
Table: Summary Statistics of Inflation Rate, Unadjusted Seasonally,
Canada and the United States, 1984:M2-2014:M5, the United Kingdom, 1984:M2-2013:M12
Summary Statistics of Inflation Rate, Unadjusted Seasonally, Canada and the United States, 1984:M2-2014:M5, the United Kingdom, 1984:M2-2013:M12

The average long-run monthly inflation rates for Canada, the US, and the UK are respectively .18 %, .23 %, and .24 %. The averages reported for each month in the above table equate the average long-run monthly inflation rates augmented by the seasonal variations. There are five months in Canada and the UK versus six in the US where average inflation rates are below their long-run averages due to seasonal variations that are negative. The months common to these three countries are: June and December.

Observe that in December, whereas prices fall in both Canada and the US, in the UK, they do not. Inflation rate is just below its long-run average. Prices fall, in the UK, only after the end-of-year celebrations, in January.  Moreover, contrary to Canada and the UK, prices increase in the US in January.