How to confuse people with financial statistics

Reuters

12 hours ago

NEW YORK, August 8 (Reuters) - Inadvertent fumbles in the presentation of financial data have become endemic across the media space, which can confuse readers at a time when statistical literacy is more important than ever.
Having a basic grasp of statistics and finance is especially crucial today, when updates of economic indicators are being weaponized in political battles and many companies are 'managing earnings,' sending their stock prices above the levels justified by their actual results. Statistical miscues, even when they're unintentional, can leave readers ill-equipped in our data-driven world.
Consider this highlighted data point from an article in the July 20 New York Times business section: '2.7%, the rise in inflation in June from a year earlier.'
Did inflation actually rise from a year earlier? Nope. Inflation is a rate, that is, a period-over-period change. In this case, 2.7% represents the year-over-year rise in the Consumer Price Index. Conceptually, if you paid $100 for a basket of goods in June 2024, you would have had to pay $102.70 for the same selection of items in June 2025.
In short, 2.7% was the inflation rate for June 2025, not the rise in inflation. In fact, the inflation rate didn't rise at all in June 2025 versus June 2024. It fell by 0.3 percentage points.
This matters because there already appears to be considerable confusion among Americans about what has happened with the inflation rate. For example, consumers may tell pollsters that inflation is still high even though it has declined considerably because they are focusing on the fact that prices are much higher than they were a few years earlier, not that they have stopped rising rapidly.
Indeed, concerns about the price level – rather than changes in the inflation rate – appear to have played a role in reducing support for Democratic candidate Kamala Harris in the most recent presidential election, according to Johns Hopkins political economist David A. Steinberg., opens new tab
STOCK V. FLOW
Another type of financial misunderstanding has also been making the rounds lately: confusing a stock with a flow.
In its recent 'Obscene Wealth Issue,' The New Republic wrote that the combined net worth of members of Donald Trump's administration would enable them to buy Denmark, using the country's $450-billion GDP as the price tag.
This is like saying you could buy a high-tech company with sales of $1 billion for a price of $1 billion, when, in fact, the actual purchase price would be many multiples of sales.
This confusion is similarly illustrated by an April 22 Washington Post headline: 'Trump's inner circle weighs push for higher taxes on millionaires.'
Nowhere in the United States is there now, nor is there likely to be anytime soon, a 'tax on millionaires.' A millionaire is, by definition, a person whose net worth is $1 million or more.
The administration was reportedly weighing whether it should endorse a tax hike on Americans earning more than $1 million a year.
An individual earning $100,000 who regularly saved and invested prudently, eventually building up a net worth of $1 million, would not have been affected. A so-called millionaire tax would, however, be due from a spendthrift who runs through a $1 million-a-year income without managing to save anything.
And it's not just media outlets that can slip up, but also their sources. A recent Bloomberg article described how some colleges are building seniors housing on their campuses and inviting the residents to enroll in courses.
The article quotes Purchase College's vice president for administration, who notes that the 'income (from the senior living facility) is a relatively small part of Purchase's balance sheet.'
Actually, that income is not a 'relatively small part' of the college's balance sheet, but rather no part. Income is instead a component of the income statement.
And not to put too fine a point on it, but the annual payment from the retirement community is revenue. The associated income is calculated after deducting related expenses, including allocation of overhead.
Once again, this is the difference between a stock – the assets and liabilities of an entity – and a flow – the entity's revenue and costs.
So why is it important to understand this distinction? First, because making sense of companies' financial statements depends on it. For example, an investor who does not know a flow from a stock would likely be flummoxed to learn that a company lost $1 billion last year, yet only saw its shareholders' equity decline by $500 million. But this could be the case if this company sold $500 million of new shares during the period.
Or consider that the financial news often speaks about both billion-dollar companies and billion-dollar industries. The former is an entity with a market valuation of $1 billion or more, and the latter refers to industries in which the combined sales of the companies total at least several billion dollars. Dealing with that sort of definitional inconsistency requires understanding the difference between a stock and a flow.
Given that statistics are used to justify everything today, from a vote in a local election to a vote by a corporate board, it is essential that consumers, business leaders, and government policymakers have timely, accurate information and, just as important, that they all know how to interpret it.
(The views expressed here are those of Marty Fridson, the publisher of Income Securities Advisor., opens new tab He is a past governor of the CFA Institute, consultant to the Federal Reserve Board of Governors, and Special Assistant to the Director for Deferred Compensation, Office of Management and the Budget, The City of New York).
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