Published 04 Jan, 2024
Launched in December 2021, Truflation’s flagship US CPI index has just turned two years old. Truflation drew inspiration for this index from the lack of relevance and timeliness in existing inflation data, primarily the CPI and PCE indexes. These two most widely used inflation indexes suffer from several drawbacks, most notably the significant lag in the data and the limited number of data points.
In 2021, Truflation set out to remedy these shortcomings by building the most comprehensive inflation measurement tool in the market. Today, with more than 30 licensed data providers supplying over 13 million census-level data points, Truflation’s US CPI index is reported daily and is 30 times faster than traditional metrics.
This unbiased, transparent metric enables investors, businesses and institutions to make timely financial decisions. In this blog, we outline the methodology powering Truflation’s growing index suite.
Comparison between ONS CPI and Truflation’s US CPI index
Truflation’s methodology follows a seven-step process for establishing a real-time CPI index fit for modern needs. This approach requires the implementation of guardrails to ensure changes in the indexes are not the result of factors outside the core data collected. Let’s dig into each of the seven steps.
Step 1: Household expenditure establishment
Truflation has identified 12 key household expenditure categories for its flagship US CPI index, whose weightings differ from the CPI and PCE indexes. These categories are Food & non-alcoholic beverages, Alcohol & tobacco, Clothing & footwear, Housing, Utilities, Household durables and daily use items, Health, Transport, Communications, Recreation and culture, Education and Other.
Each of the 12 categories represents a percentage of total household expenditure and their definitions are consistent for all geographies covered by Truflation to ensure the indexes are scalable and comparable across markets. However, the relative importance of each of the categories does vary by market.
Step 2: Data sources
Truflation works with a wide variety of data partners to ensure a diverse data pool and to establish the most accurate average prices in each of the categories and sub-categories. This approach minimizes the potential for error and avoids single points of failure.
Truflation licenses data from commercial and public data sources, data aggregators, and research institutes and regularly adds new data partners to the index. At present, the list of
data providers includes Plaid, Credit Card data, Census, Mini Census, Personal Inflation Calculator, Global Demographics and other household establishment expenditure surveys. All new data providers remain in a sandbox environment prior to verification.
Step 3: Ingestion of data
Truflation captures new data from each source daily at 10:30 PM Coordinated Universal Time (UTC). This data then undergoes an automated quality control process, including historical comparisons and verification that at least 13 consecutive months of data are available from each source to facilitate year-over-year (YoY) comparisons. Truflation reports data with a 24-hour delay to allow for these daily quality checks.
Step 4: Normalization / Indexing
After the data is normalized and indexed, it must pass a second round of quality control. All Truflation’s indexes have a base date of January 1, 2010. The calculation for the Truflation CPI index is as follows:
CPI1 - the cost of the basket of goods on a day X the year n+1
CPI0 - the cost of the basket of goods on a day X at the year n
Step 5: Categorization / relative weighting
The weighting for each data point is determined by the number of items tracked, geographical representation, methodology and market share within a geography. Each category's relative importance is calculated based on the impact from multiple sources. Category weightings are updated at the beginning of each year to reflect changes in consumer behavior.
Step 6: Aggregation of indexes
After a third quality control round, all subcategory indexes are combined into an inflation metric through a weighted average, which involves multiplying the index by its relative importance (weight) of the household expenditure category.
Step 7: Data deliverables
Truflation publishes data for the current inflation index, the index a year ago, and the year-over-year percentage change. Its offering has now grown to a total of 31 indexes, including Core and Non-Core CPI, Goods and Services CPI, and granular category indexes for the US and UK.
Truflation’s indexes are available via its dashboard, a subscription-based API download service, the Truflation Enterprise solution and its real-world asset (RWA) Oracle. Using its tried and tested methodology, Truflation also creates custom indexes for customers who require a more tailored approach, aiming to support the exponential growth of RWA tokenization on-chain.
Want to learn more about Truflation’s offering? Check out our subscription options!