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Person visualizing the data analysis necessary for successful investment
getty
To invest well in 2022, investors need to know what’s going on. With the inflation cycle having arrived, a full analysis is essential. Having access to competitive and relevant data is now essential because media coverage of the effects of inflation is incomplete and misleading.
Fortunately, there is one great source, and it’s free. The FRED (Federal Reserve Economic Data) site has been managed for thirty years by the economic team of the Federal Reserve Bank of St. Louis.
Data is updated as soon as it is reported and the website provides a wide variety of analytical tools. The complete history is kept and everything is downloadable in many forms. Calculations and comparisons of multiple series are straightforward. Creating graphics is also easy, with the ability to adjust presentation characteristics.
FRB de St Louis / FRED home page
John Tobey (FRB de St Louis – FRED)
An example of using FRED for economic analysis
The example below shows how to perform an analysis of recently published, but poorly reported personal consumption expenditure (PCE). (For more explanation, see “Investors: Media Confusion About Inflation Means We’re Lonely”)
First, because most media reports
Focusing on the unadjusted data, let’s look at the comparison between nominal and inflation-adjusted (actual) total spending. The illustration shows the almost 3-year index pattern starting at 100 in December 2018.“Most” of the media in this case do not include Bloomberg, who reported “
Inflation-adjusted spending in the United States stagnates as prices rise
“
Note: I chose this start date to show good health 2019, 2020 driven by Covid and 2021’s move towards normality. I used a logarithmic scale so that the constant growth rates were visible as straight lines.
Personal consumption expenditure – Nominal and inflation-adjusted indices
John Tobey (FRB de St Louis – FRED)
Note the recently expanding spread. It shows an increase in inflation. So let’s see how much by looking at nominal growth rates versus actual 12 month growth rates.
Personal Consumption Expenditure – 12-Month Nominal Inflation-Adjusted Percentage Changes
John Tobey (FRB de St Louis – FRED)
First, these results show why the media’s use of unadjusted growth rates is misleading. Note that the inflation-adjusted (real) growth rate is not only lower, but it is also stable. Price increases are fully responsible for the false impression of rising growth.
Next, let’s take a look at the PCE price index itself. The green line is the price index (left scale) and the orange line is the 12-month percentage change (right scale).
PCE price index and 12-month change
John Tobey (FRB de St Louis – FRED)
Indeed, it is inflation that is increasing, not real growth. Let us now look at the distribution between goods and services (the latter represent about 70% of the total PCE). The two charts are the price indexes and then the 12 month percentage price changes.
Total PCE, price indexes of services and goods
John Tobey (FRB de St Louis – FRED)
Total PCE, services and goods 12-month percentage change in price indices
John Tobey (FRB de St Louis – FRED)
Well, there is a difference. Service providers steadily increased their prices until 2019, in line with the general inflation rate of 2%. In contrast, producers of goods have lagged behind, probably for reasons of demand and competition. Then the 2019 divergences gave way to an upward trend in catch-up prices by goods companies.
Coincidence or not, the price indices have converged. After nearly three years of independent movement, prices for services and goods are both up around 8% since December 2018.
To go further, let’s take a look at the two main categories of goods: durable and non-durable. Again, the two charts are the price indexes and then the 12 month percentage price changes.
Total, durable and non-durable price indices of PCE goods
John Tobey (FRB de St Louis – FRED)
PCE goods – total, sustainable and unsustainable 12-month percentage change in price indexes
John Tobey (FRB de St Louis – FRED)
The prices of durable and non-durable goods move only slightly differently, but both are showing the same faster increases this year.
With this we have a more complete picture of what is going on. Does this mean that current trends will continue? No, but it does mean that real PCE growth has stalled and the rise in prices (inflation) has increased. It is an unhealthy pattern. While that may change in 2022, it is a serious concern that investors need to recognize.
The bottom line – Comprehensive and easily accessible data makes FRED a valuable investment tool
Having used FRED for many years, I can attest to its thoroughness, precision and utility. Its ease and speed of use allows for free-form analysis (i.e., like the above steps, using the observed results to guide the analytical process). It is an especially important tool for testing the information, assumptions, and conclusions that we hear and read.
This is 2022 … get ready getty
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