Median CPI, not seasonally adjusted, slightly better in tracking trend inflation: Cleveland Fed

Nonseasonally adjusted median CPI is slightly superior to median CPI in tracking trend inflation, say Cleveland Fed researchers

A key purpose of inflation measures like the Cleveland Fed’s median CPI is to offer an accurate signal of trend inflation in the midst of noisy inflation data. While the median CPI has proven useful, it has an inherent drawback; its history is subject to revision when the BLS releases updated seasonal adjustment factors for the CPI. Federal Reserve Bank of Cleveland researchers Randal Verbrugge and Amy Higgins constructed a nonseasonally adjusted version of the median CPI and compared its performance (in seasonally adjusted form) to the median CPI and core CPI. They found that:

• The median CPI and NSA-median are considerably better at tracking trend inflation than the core CPI.
• For the two median indexes, using only three months of time averaging reaps large rewards, in terms of achieving lower volatility and in tracking trend inflation.
• The NSA-median is a useful signal of trend inflation and a promising candidate for further study.

“The NSA-median measure is slightly superior to the median CPI in tracking trend inflation,” say Verbrugge and Higgins. “But in keeping with prior research, we find that both of the median series clearly dominate the core CPI for discerning inflation trends.”

Read Is a Nonseasonally Adjusted Median CPI a Useful Signal of Trend Inflation?

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Federal Reserve Bank of Cleveland

The Federal Reserve Bank of Cleveland is one of 12 regional Reserve Banks that along with the Board of Governors in Washington DC comprise the Federal Reserve System. Part of the US central bank, the Cleveland Fed participates in the formulation of our nation’s monetary policy, supervises banking organizations, provides payment and other services to financial institutions and to the US Treasury, and performs many activities that support Federal Reserve operations System-wide. In addition, the Bank supports the well-being of communities across the Fourth Federal Reserve District through a wide array of research, outreach, and educational activities.

The Cleveland Fed, with branches in Cincinnati and Pittsburgh, serves an area that comprises Ohio, western Pennsylvania, eastern Kentucky, and the northern panhandle of West Virginia.

Media contact

Doug Campbell, doug.campbell@clev.frb.org, 513.218.1892