Median CPI 50% More Accurate (vs. CPI) at Gauging Future Inflation, Suggests Inflation Not a Problem
Earlier today, the BLS reported that the seasonally adjusted CPI for all urban consumers was increased 0.4% (4.9% annualized rate) in November. The CPI less food and energy was virtually unchanged at 0.0% (0.4% annualized rate) on a seasonally adjusted basis.
Over the last 12 months, the median CPI rose 1.3% (see chart above), the CPI rose 1.8% (first positive 12-month change since February 2009), and the CPI less food and energy rose 1.7%.
According to the Cleveland Fed:
Federal Reserve policymakers are always on the lookout for inflation (i.e., a general increase in prices), and they use a variety of measures to gauge inflation trends. One such measure is the Consumer Price Index (CPI), published by the Bureau of Labor Statistics (BLS).
The CPI measures changes in the prices of a number of goods and services—things like gas, rent, groceries, and clothing. However, the prices of some of these items—such as food and energy—are volatile; they can change a lot from month to month, based on supply and demand. So the BLS also publishes a measure of “core” prices that excludes food and energy prices. Researchers at the Federal Reserve Bank of Cleveland and The Ohio State University devised a different way to get a “core CPI” measure—or a measure of underlying inflation trends. It’s called the Median CPI.
To calculate the median CPI, the Federal Reserve Bank of Cleveland looks at the prices of the goods and services published by the BLS. But instead of calculating a weighted average of all of the prices, as the BLS does, the Cleveland Fed looks at the median price change—or the price change that’s right in the middle of the long list of all of the price changes. According to research from the Cleveland Fed, the median CPI provides a better signal of the inflation trend than either the all-items CPI or the CPI excluding food and energy.
Here's a video explaining the median CPI:
Bottom Line: Historically, the median CPI has been 50% more accurate at gauging future inflation than the traditional CPI (based on the Cleveland Fed's research), and the median CPI is now suggesting that rising inflation is not an imminent problem. In fact, the decrease in November's median CPI to 1.3% from 1.45% in October was the 14th consecutive monthly drop in median CPI inflation (see chart above).