Inflation

Stephen Few is a consultant who specializes in graphic design of business intelligence. He's a practical Edward Tufte. He did a 2 day training at Coldwater Creek and I keep up with his blog. He posted an article this week from a friend of his - Jonathan G. Koomey.

The article discusses the necessity to adjust for inflation when analyzing monetary trends over time. It is somewhat obvious - but who actually does it? Economists yes - its what they do. But do we do it for our statistical and geographic endeavours? Thanks to Allan Greenspan, and our low inflation rates, it has really been almost a moot point for the past handful of years.

I started thinking. What other inflationary type effects exist that should routinely be controlled for? If your business has changed pricing strategy, then how have you adjusted forecasted sales? Is your product mix constant? Has your percentage of sales per channel evolved?

An average order value, year over year, may have changed significantly. A probability to purchase a swim suit, when we are now focusing on dresses, has lost historical meaning. And if you are doing life time RFM - is a $50 purchase 10 years ago still $50? Do you correct that for inflation or decrease it since its NPV is less? Would you increase costs as well if you are forecasting profit?

Thus, in the RFM mix, only one component is changing and small M changes could mix things up quite a bit. It could work against recency as an inflation adjustment would increase sales - which would be the wrong thing to do. From a store sales forecasting/analysis perspective, when looking over 10 years, correcting for the changing nature of monetary values would obviously be necessary, but for a year-over-year statistical models - I'd have to play first and see.