Wednesday, December 16, 2009

Median CPI 50% More Accurate (vs. CPI) at Gauging Future Inflation, Suggests Inflation Not a Problem

According to a report just released by the Federal Reserve Bank of Cleveland, the median Consumer Price Index was virtually unchanged at 0.0% (0.2% annualized rate) in November. The median CPI is a measure of core inflation calculated by the Federal Reserve Bank of Cleveland based on data released in the Bureau of Labor Statistics' (BLS) monthly CPI report.

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).

16 Comments:

At 12/16/2009 2:50 PM, Anonymous Machiavelli999 said...

Research? Data? Facts? MATH?!?!?

Ugh...

Tea Parties! Buy Gold! Sarah Palin! Death Panels!

Wooooooooo!!!!!!

 
At 12/16/2009 3:17 PM, Anonymous morganovich said...

how accurate is CPI at predicting inflation?

this seems like an important baseline to establish in order to determine how big a deal 50% more predictivity is.

if 2% goes to 3%, who cares? (or 10 goes to 15 etc)

if it's 50 goes to 75, that's something much more interesting.

 
At 12/16/2009 3:54 PM, Anonymous Anonymous said...

Research? Data? Facts? MATH?!?!?

Why am I not surprised that all of these things are questions for you?

 
At 12/16/2009 4:27 PM, Anonymous Benny The Man said...

Forget about inflation. We were lucky to avoid a serious deflation.

 
At 12/16/2009 4:30 PM, Blogger juandos said...

"Why am I not surprised that all of these things are questions for you?"...

Hmmm, maybe English isn't mach999's first language...

I'm betting that mach999 has no problem understanding and approving of Sen. Blanche Lincoln though...

 
At 12/16/2009 5:35 PM, Anonymous Lyle said...

In particular one can expect the contribution from owner equivalent rent to be negative for a while to overall CPI. There are stories of lots of for rent signs around, putting downward pressure on rents. The use of owner equivalent rents rather than some factor of average mortgage payment for part of housing costs, kept inflation down during the boom, and it is keeping inflation rate up now.

 
At 12/16/2009 5:47 PM, Blogger Walt G. said...

Wouldn't the average consumer have a more accurate measure of his or her purchasing power using the more volatile index that includes real-world purchases like food and fuel? Isn’t purchasing power what is important to most of us?

I can see where policy makers need the adjustment of the spikes to do their job, but to attempt to use that data at the individual level is invalid, irrelevant, and unworthy of discussion by people who just go to work every day and try to make a living.

Any future trend projection has to account for food and fuel prices for most of us because we depend on and buy those items. If so, how can a calcuation that does not count them be more accurate than a calucation that does?

 
At 12/16/2009 6:38 PM, Anonymous Ovess said...

NOBODY (of any relevance) is saying inflation is an immediate problem or will be a short term problem, but thanks for beating that straw man.

The concern is that inflation will become a severe problem in 1-3 years as all the hot money and low interest rates finally start pulling prices up in a jobless and slow recovery. We'll be looking at Stagflation part Deux.

I'm not predicting inflation will be a problem, but there's enough money floating around to be a serious concern for any serious economist. The issue deserves to be watched, not casually dismissed as we so often see.

 
At 12/16/2009 6:43 PM, Anonymous Singo said...

Lyle, all the major CRE data sources are predicting declining rents through year-end 2010 to year-end 2011 in most cities for all property types. Apartment vacancy rates are expected to begin falling early next year while the rest will be crippled until 2012. Even apartments is a questionable recovery since so many houses and condos are entering the market.

 
At 12/16/2009 7:22 PM, Blogger Jack Lacton said...

With so much extra money being pumped into the system I wonder whether historical comparisons such as this are relevant...

 
At 12/16/2009 9:48 PM, Anonymous Anonymous said...

The housing market will go on into ifinity and beyond......

 
At 12/16/2009 11:13 PM, Blogger BxCapricorn said...

If you're not making money off all of this number crunching, isn't this just statistical -----bation?

 
At 12/17/2009 1:38 AM, Anonymous Lyle said...

What I was thinking of was a cpi where mortgage rates were used in some fashion as compared to owner equivalent rents. Yes rents are decreasing, but the question is are they decreasing as fast as mortgage payements, if so then the choice is cpi neutral. I think its clear that since rents did not run up as fast as prices/mortgage payments during the boom, inflation was possibly understated during that time. (Recall that one of the metrics that suggested was that rent was historically cheap compared to house prices at the time)

 
At 12/17/2009 7:05 AM, Anonymous geoih said...

You can't have it both ways. Last year when everybody was afraid of deflation, the median CPI said there was inflation. Now the indicies are showing the opposite trend and you want to switch.

All of these price indices are just symptoms of inflation, not measures of it. Inflation is the increase in the money supply, which has been happening at an alarming rate for over a year (or ten years or 100 years, pick your scale). Inflation manifests itself in many ways, not always in immediate changes in consumer prices.

 
At 12/17/2009 2:03 PM, Anonymous Eric H said...

Reminds me of those GWB-era press releases reminding us inflation is "only 4%".

So what you are saying is, as long as we don't need food, housing, heat, air conditioning, refrigeration, lights or transportation, we don't have anything to worry about.

 
At 12/17/2009 4:51 PM, Blogger VangelV said...

If we were to measure CPI in the way we used to pre-Boskin/Greenspan we would see that it is running around 5% per year.

 

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