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I believe inflation is greatly affecting my sample data, even when using percent-changes for movements. I have read this post, which recommends the formula ((Current-Base Year CPI) * Price) / (Historical Year CPI) - and uses the U.S Consumer Price Index For All Urban Consumers. However, there are many of these indexes (Apparel, Energy, Housing, etc.).

What is the standard practice for quants, and is this even necessary? (I see no other questions on this stack, and this post earned me a tubmleweed).

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2 Answers 2

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The U.S. Consumer Price Index For All Urban Consumers (http://research.stlouisfed.org/fred2/series/CPIAUCSL) is the CPI you hear in the news, and is the standard inflation number.

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The last thing that was confusing was whether to use the Seasonally Adjusted or Non-Seasonally Adjusted Index. Your post points to the Seasonally Adjusted Index, so I assume that is the correct one... Is there ever a reason to use the Non-Seasonally Adjusted Index? –  poorly_built_human Jul 18 at 3:21
    
Maybe if you don't trust the adjustment they made you would use the Non-Seasonally Adjusted Index so that you could either reproduce it or come up with your own adjustment. Can anyone else think of a reason? –  User1996 Jul 18 at 13:18

There are actually a lot of options nowadays.

Adjusting your data using historical realized inflation is certainly one way to go. And as @User1996 mentioned, the CPI for All Urban Consumers is the frequently quoted "headline" number.

However, to the extent that asset prices reflect inflation expectations, it might be better to use forward-looking inflation expectations instead. For example, you could use inflation swaps (which are not perfect measure, since they embed an inflation risk premium). An excellent series that I frequently use in my own research is Cleveland Fed's inflation expectations estimates (http://www.clevelandfed.org/research/data/inflation_expectations/, there's an Excel spreadsheet at the bottom). These are also based on inflation swap, but subtracts out inflation risk premium.

I also publish some inflation expectations data on my blog http://hungrydummy.com/chart/.

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Thank you for your reply, and additional suggestions. Forward-looking inflation swaps, once I read your links and figure out what they are, are beyond me at this point. From what little I have already read, I'm not sure how they direclty relate to adjusting a 1950's dollar value to present day, for matters of comparison... as can be done with the appropriate CPI. –  poorly_built_human Jul 13 at 4:58
    
Thank you for your input. Without having time to investigate your second option, I have to give the answer to User1996 since he got to my original question first. But you did get a +1 :) –  poorly_built_human Jul 18 at 3:19

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