The Zhitong Finance App learned that on Friday, the US Bureau of Labor Statistics will update the seasonal adjustment factors for monthly inflation data on an annual basis. In the past, this adjustment was not taken seriously, but this time, Wall Street and economists are very concerned.

The reason is that a year ago, the consumer price index (CPI), which usually has very little correction, was adjusted so much at the time that it made people doubt the overall progress of inflation.

Now, as Federal Reserve officials are struggling to find more evidence that they relieved price pressure before they promised to cut interest rates, the risk of another drastic adjustment this time unsettling policymakers and investors.

Federal Reserve Governor Waller's speech on January 16 drew people's attention to these data and prompted investment banks to publish a series of research reports on this topic.

“Recall that a year ago, when inflation seemed to be falling rapidly, an annual update on seasonal factors erased these developments,” Waller said in his speech. “I hope these revisions confirm the progress we have seen, but good policies are based on data, not hope.”

The US Bureau of Labor Statistics has always regularly adjusted monthly CPI data to eliminate seasonal factors affecting the data. For example, this data might include estimated impacts of harvests or trends related to holiday shopping. By smoothing these data through seasonal adjustments, it is possible to make meaningful comparisons of inflation in different months of the same year.

However, as the US Bureau of Labor Statistics explains on its website, the process of quantifying seasonal patterns itself requires adjustments from time to time to keep up with changes in climate, production cycles, model changes, and other factors. As a result, seasonal adjustments need to be updated every year.

And the market was taken aback by last year's adjustments.

In the last three months of 2022, preliminary data showed that the consumer price index (an important indicator for measuring potential inflation trends closely watched by the Federal Reserve), which excludes food and energy, grew at an annualized rate of only 3.1%, down from 8% in the same period in 2021.

However, the positive signals that this data gave off ultimately proved false. After the correction, 3.1% was recalculated to a higher 4.3%. Four days later, the core CPI annualized growth rate for January was also revised to 5.1%. Suddenly, the tone surrounding the outlook for inflation and interest rates changed.

This brought extraordinary attention to the information to be released on Friday. However, some economists are still trying to cool down this sentiment in the market.

Bank of America economists led by Michael Gapen wrote in a report to clients on January 25, “In our 10-year sample, the absolute average of monthly revisions was only 2.6 basis points,” while the monthly revised average for the fourth quarter of 2022 was 9 basis points.

“We don't expect last year's situation to be repeated,” the team said, and they don't think this revision will affect the outlook for monetary policy.

Bloomberg Economics economists Anna Wong, Stuart Paul, Eliza Winger, and Estelle Ou said, “Federal Reserve Chairman Powell has shown that in uncertain situations, he tends to act slowly when formulating policies. This is a key reason for delaying interest rate cuts — although inflation data, including the CPI seasonal factor correction announced on February 9, will support the March rate cut.”

Morgan Stanley economists, led by Ellen Zentner, threw more cold water on this topic in their Jan. 30 report.

They said, “Last year's revised CPI was an outlier. From a purely statistical point of view, the probability of seeing another outlier in the upcoming correction is very low.”

However, the Morgan Stanley research team later suggested that the COVID-19 pandemic has severely distorted seasonal factors, and these factors may affect CPI in the next few years, raising market questions.

They said, “The last correction may have been the starting point for a series of large seasonal fluctuations, but it is difficult to judge from an extreme example alone.”