Median CPI Inflation Below 1% for the 12th Month

by: Mark J. Perry

According to a report released Thursday by the Federal Reserve Bank of Cleveland, the median Consumer Price Index rose 0.2% (0.5% annualized rate) in January. The "median CPI" is a measure of core inflation calculated by the Federal Reserve Bank of Cleveland based on data in the monthly CPI report from the Bureau of Labor Statistics (BLS).

Earlier Thursday, the BLS reported that the seasonally adjusted CPI for all urban consumers was up by 0.4% in January. The CPI less food and energy increased 0.2% in January. Over the last 12 months, median CPI inflation was 0.8%, compared to CPI inflation of 1.6% (see chart above).

According to the Cleveland Fed:

Federal Reserve policymakers are always on the lookout for inflation (i.e., 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 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 food and 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 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." (emphasis added)

Historically, the median CPI has been 50% more accurate at gauging future inflation than the traditional CPI (based on the Cleveland Fed's research), and the median CPI is not now showing any early signs of inflationary pressures. Although the median CPI inflation rate increased to 0.8% in January from 0.6% in December, it's been below 1% in every month since last January, which is the lowest inflation over a 12-month period in the history of the median CPI index back to 1984 (see chart).