Saturday, June 20, 2009

Cleveland Fed's Median CPI Inflation vs. BLS

Greg Mankiw has an interesting post on the difference between standard CPI inflation reported by the BLS and an alternative measure of inflation calculated by the Cleveland Federal Reserve based on the median CPI. Professor Mankiw points out that:

The average of any data set can be thrown off by a few extreme outliers; the median is a more robust statistic to estimate the central tendency in the data.

Right now, the two measures of inflation are diverging substantially. The standard CPI shows deflation over the past year, but that average is due to a few anomalous sectors, such as energy. If you look at the median CPI, which shows what a more typical price is doing, the inflation rate does not look very unusual (see chart above).

MP: The
BLS reported on Wednesday that annual standard CPI inflation (deflation) from May 2008 to May 2009 was -1.30% (see chart), mostly because of a -27.3% decrease in the energy prices and a -14.3% decrease in transportation prices from a year ago (when gas was almost $4 per gallon and oil was about $125 per barrel).

In contrast, the
Cleveland Fed reported on the same day that its adjusted, Median CPI increased by +2.4% year-to-year through May 2009 (see chart).

The Cleveland Fed has been studying and reporting median CPI for a long time, here is a paper from 1991 on "
Median Price Changes: An Alternative Approach to Measuring Current Monetary Inflation."

Here's an
interactive graphing feature from the Cleveland Fed for creating charts of inflation.


At 6/20/2009 3:55 PM, Anonymous Anonymous said...

Ok, you've given us two measures of inflation. Each one might be more relevant than the other depending on what you're analysing.

What's your take on it? Which measure do you prefer, why, and what does it say to you? Is the increase in MS creating inflation or must we worry about deflation?

It's like climate change. Do I buy a home in Mexico or Canada?

At 6/20/2009 5:22 PM, Blogger bobble said...

interesting. thanks for the link to the cleveland frb.

it's too bad that the cleveland data only goes back to 1982. it would be instructive to see what the cleveland frb calculated inflation was in 1979-1980. at that time the BLS was reporting 16%.

At 6/20/2009 5:31 PM, Anonymous Anonymous said...

It looks like the CPI median chart just moderates and follows the more-extreme swings of the "real" CPI. meaning that the median is going to start going down soon too.
I sense it is a great time to take a solid expansionist monetary policy. What is factory utilization? House prices? Wages?
Aside from medical care (and even there, measuring improvements vs. prices is difficult) prices are squishy.
Run the printing presses on high for a few years. If we ever expect to pay of our national debt, we are going to have to invalidate about half of it by running 5 percent inflation for 8 years or so....ultimately, a cheap exchange will encourage foreign investment and boost domestic industries...while rapid increases in worker productivity overseas dampen inflation also....
Let 'er rip Ben Bernanke! When I can use Ben Franklins for wallpaper --okay, George Washingtons -- then I will be satisfied.


At 6/20/2009 11:00 PM, Anonymous Anonymous said...

Run the printing presses on high for a few years. If we ever expect to pay of our national debt, we are going to have to invalidate about half of it by running 5 percent inflation for 8 years or so....

Spoken like a true parasite.

At 6/21/2009 2:56 PM, Anonymous Anonymous said...

No, I just recognize the United States for what it is. We lack the leadership to run a balanced federal budget. How many years since 1966 have we been in balance?
Trade deficits, don't get me started.

Now, in the 1950s through the 1970s, the top federal income tax rate ranged from 70 percent to 90 percent. I doubt we will ever do that again.

Ergo, how do we pay down debt? Wen you honestly answer that...except you can't. you know we lack the will to do it. The USA government, R-Party and D-Party, is like an alcoholic in a bar. They is never any reason spend less, or go outside and work.

Ergo, we have to inflate our way out of this.

I hope Bernanke stays up late nights running those presses on high!

At 6/21/2009 5:31 PM, Anonymous Anonymous said...

When you seek to perpetuate welfare programs - many for those who are not in need - by confiscating peoples savings through inflation, you're a parasite.

The debt being taken on by Obama and his cronies has nothing to do with peoples welfare.

I suggest we stop spending money we do not have. I know, it's a radical idea for those who seem to lack "will".


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