Federal Reserve policymakers are always on the lookout for inflation (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 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. According to newer research done at the Cleveland Fed, the Median CPI is even better at forecasting PCE inflation in the near and longer term than the core PCE.
Watch this simple explanation of the Median CPI and how it’s used to gauge inflation.