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). 

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

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. 

Seasonality in Monthly Inflation Rate in Canada

Seasonal variations in monthly inflation rate in Canada reflect the sales pattern in the retail industry.

Summer has arrived with our letter boxes being filled with flyers announcing, here and there, great deals on furniture, household appliances, sports equipment, travels … Many items seem cheaper at this moment of the year. But is it the best time for shopping?

The figure below plots monthly series as well as monthly averages of inflation rate in Canada. Inflation rate is the percent change in the level of the price of the goods and services we consume. In the series plotted below food, energy, and the effects of indirect taxes are excluded.  

Figure: Inflation Rate, Unadjusted seasonally, Canada, 1984:M2-2014:M5, Data Source: Statistics Canada

Table: Summary Statistics of Inflation Rate, Unadjusted seasonally,

Canada 1984:M2-2014:M5

The monthly long-run inflation rate, in Canada, is .18 %. Seasonal variations add, each month, to this rate. Thus, December is the only moment of the year prices mostly fall. They fall, on average, by .13 %. This is due to seasonal variations (December sales), which are in the order of .31 percentage points. In January, consumers still benefit from the low prices of December because the end-of-year sales that go on offset the expected increase in prices. The sales in January actually aim at reducing inventories. New stocks arrive in February and are sold at their regular prices, which brings inflation to .29 percentage points above its long-run level. The average increase in prices in February, which is in the end .47%, is higher than at any other moment of the year.

In June, inflation is almost nil because the expected increase in prices is again offset by the seasonal variations that have to do with the sales taking place at that moment of the year but the deals offered cannot be compared to those of December that cause a general fall in prices.

The increase in prices in April and December are, on average, lower than the long-run inflation rate due to negative seasonal variations that have to do with Easter and autumn sales.

Prices are indeed low In January but, as the monthly standard deviations in the above table indicate, they fluctuate to a very great extent one year to another. Both the lowest and the highest inflation Canada experienced occurred in January. In January 2009, prices fell by .71 %, which contrast with the historical rise of .98 % in prices that occurred in January 1991.  About 89 % of this variability observed in January is due to cyclical and random components in prices.