Sometimes the 12-month inflation number reflects current price trends, but often investors need to dive deeper. Take February 2020 as an example. Both the 12-month inflation rate and the 3-month inflation rate were 2.3%. The long-term and short-term trend were the same.
Very quickly though, COVID hit, people spent less and while the 12-month inflation numbers dropped, the bigger story was that inflation was negative in March-June 2020. This set up economists and politicians to call inflation ‘transitory’ a year later in Spring 2021 when in fact it wasn’t.
12-month inflation is just today’s number divided by last year’s number. The negative inflation experienced in Spring 2021 created a ‘divisor’ that was lower than it would have been without the COVID crisis creating negative inflation during that time.
When April 2021 inflation saw a jump to 4.2% many people rightly pointed out the low number from April 2020 that was being used as a divisor. What was missed was that diving deeper into the numbers investors could see 3-month inflation was more than double at 8.6%.