Question

Often times the business press will report an economic indicator whose

movement in the past month was substantial and use it to draw

dramatic conclusions. For example, there could be a movement in

consumer prices in September of 1.0%, implying an annual rate of

12%! Should every period-to-period change in an economic variable

be given the same importance and emphasis? Why or why not?

Answer 1

Any analysis of an economic variable must be done “in context”. So, there could have been a big movement in consumer prices, but you also may know, from the context, that it was due solely to a weather problem that raised the price of staple foods worldwide. You will also know that such weather is temporary, and that food prices will soon fall back to normal levels. Thus, taking one month’s worth of data and extrapolating it to an annual number can be very misleading.