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03.24.22

Adjusting Median and Trimmed-Mean Inflation Rates for Bias Reveals Recent Understatement of the Trend in PCE Inflation

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Median and trimmed-mean inflation rates tend to be useful estimates of trend inflation over long periods, but they can exhibit persistent departures from the underlying trend over shorter time frames. In this Economic Commentary, Cleveland Fed researchers Robert Rich, Randal Verbrugge, and Saeed Zaman document that the extent of these departures is related to the degree of skewness – the deviation from symmetry – in the distribution of price changes.

“The estimated relationship between bias and skewness suggests that we can use skewness to adjust median and trimmed-mean PCE inflation rates to remove the biases in their estimates of trend inflation,” say the researchers. “Using the latter relationship to construct bias-adjusted median and trimmed-mean measures of inflation, we find median PCE inflation and trimmed-mean PCE inflation display very similar behavior.”

Accounting for the shift from negative to positive skewness that has occurred during the pandemic, the researchers estimate that recent readings of median PCE inflation and trimmed-mean PCE inflation have been understating the trend in PCE inflation by about 15 basis points and 35 basis points, respectively.

Read more: Adjusting Median and Trimmed-Mean Inflaiton Rates for Bias Based on Skewness

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