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Cleveland Fed researchers introduce new median PCE measures

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Divining the trend in inflation is a constant challenge for economists. In their latest economic commentary, Cleveland Fed researchers Daniel Carroll and Randal Verbrugge introduce two new measures of trend inflation, a median PCE inflation rate and a median PCE excluding owners’ equivalent rent (OER) inflation rate, and investigate their performance.

The researchers highlight two main findings. First, both the median PCE inflation measure and the median PCE excluding OER inflation measure are useful indicators of the trend in inflation. Second, their performance relative to the other simple measures worsened after the Great Recession, and this worsening performance is related to the changing cross-sectional asymmetry of the growth rates of the components of PCE inflation.

“Our analysis indicates that both perform comparably to other simple trend inflation estimators such as the trimmed-mean PCE,” say Carroll and Verbrugge. “Furthermore, as performance of the median PCE is related to skewness in the distribution of cross-sectional growth rates across categories in the PCE, our results suggest that the Bowley skewness statistic may be useful in forecasting.”

Read more: Behavior of a New Median PCE Measure: A Tale of Tails

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