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Pastimes : Clown-Free Zone... sorry, no clowns allowed
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To: reaper who wrote (207846)12/4/2002 1:24:09 PM
From: GraceZ  Read Replies (1) of 436258
 
Cleveland Fed Median CPI

clev.frb.org

Median CPI Provides Better Measure of Core Inflation

clev.frb.org

Discussions of the goals of monetary policy generally focus on the benefits of stabilizing prices. However, measuring the general level of prices is difficult, as nonmonetary events can, at least temporarily, distort reported inflation statistics, such as the Consumer Price Index (CPI). During periods of bad weather, for example, food prices may rise to reflect decreased supply, producing transitory increases in the CPI. But since these prices do not constitute monetary inflation, monetary policymakers may want to avoid including them in their decisionmaking.

One commonly used technique for measuring underlying or core inflation is to exclude certain prices in the computation of the index, based on the assumption that these prices are the ones with "high-noise" components. This is the rationale behind the commonly reported CPI excluding food and energy data. However, economists Michael Bryan and Stephen Cecchetti have found a measure that forecasts inflation better than either the CPI excluding food and energy or the all items CPI: a weighted median of the CPI.

The weighted median CPI is easy to calculate and has a higher correlation with past money growth than other inflation measures, resulting in improved forecasts of future inflation. Bryan and Cecchetti believe the weighted median CPI can be a useful and timely guide for inflation policy.

clev.frb.org
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