Weighted Median Inflation Around the World: A Measure of Core Inflation

IMF Working Papers, February 24, 2023

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The paper constructs an alternative measure of core inflation: the weighted median inflation rate, for 38 advanced and emerging economies using subclass level disaggregation of the CPI over 1990-2021.
For quarterly data, the weighted median:
- Is less volatile than the standard core measure (inflation excluding food and energy).
- Is more closely related to economic slack.
- Is more closely related to headline inflation over the next year.
A drawback of the weighted median: in most countries, it has a lower average level than headline inflation.
To address this bias, the paper considers a bias-eliminated measure of core inflation based on the percentile of sectoral inflation rates that matches the sample average of headline CPI inflation.

Coverage: 38 advanced and emerging economies.
Data frequency and span: quarterly data over 1990-2021.
CPI treatment: subclass level disaggregation of the CPI to construct sectoral inflation rates and compute the weighted median.
Comparative benchmarks: standard core inflation (excluding food and energy) and headline CPI inflation.

Volatility:
- Weighted median < Standard core (in terms of volatility for quarterly data).
Relationship with economic slack:
- Weighted median shows a closer relationship to measures of economic slack than standard core.
Predictive relation to headline inflation:
- Weighted median is more closely related to headline inflation over the next year than standard core.
Level bias:
- Weighted median typically has a lower average level than headline inflation across most countries in the sample.

The paper proposes a core inflation measure that eliminates the average-level bias of the weighted median by selecting the percentile of sectoral inflation rates that matches the sample average of headline CPI inflation.