## Median Inflation Gauge Offers Better Read on Price Trends

_IMF Blog, February 14, 2022_

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**Canonical URL:** [Median Inflation Gauge Offers Better Read on Price Trends](https://www.imf.org/en/blogs/articles/2022/02/14/median-inflation-gauge-offers-better-read-on-price-trends)

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## Bibliographic details
- Authors: Laurence Ball, Daniel Leigh, Prachi Mishra, Antonio Spilimbergo
- Published: February 14, 2022

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### Overview and motivation
- Publication date: February 14, 2022
- Authors: Laurence Ball, Daniel Leigh, Prachi Mishra, Antonio Spilimbergo
- Problem: Stripping out volatile price changes to gauge underlying inflation pressures in the United States during and after the pandemic.
- Context: The traditional "core" inflation measure excludes food and energy and came into wider use in the 1970s when volatile energy prices caused inflation spikes.

### Key findings
- The traditional core measure was almost as volatile as headline inflation for most of the past two years because many large price changes occurred outside of food and energy (examples: airlines, hotels, sporting events, and financial services).
- Outlier-exclusion measures perform best at filtering transitory movements:
  - Cleveland Fed median: shows the item in the middle of the range of all price changes every month.
  - Dallas Fed trimmed-mean: omits items in the bottom 24 percent and top 31 percent of the distribution each month.
- Both the Cleveland median and Dallas trimmed-mean:
  - Filter out most monthly fluctuations in headline inflation and have been relatively stable.
  - Are more closely related to unemployment and other indicators of economic slack than either headline inflation or the traditional core measure.
  - Drifted down when the economy contracted in 2020 and then rose as the economy rebounded.
- These alternative core inflation gauges steadily increased during 2021, confirming that underlying inflation trends in the US have risen.

### Historical evidence and precedent
- Over the three decades preceding the pandemic, measures that strip out a greater share of outlier price movements were:
  - Less volatile than the traditional core inflation (excluding food and energy).
  - More reliably related to unemployment and macroeconomic conditions.
- Inflation excluding food and energy was more volatile than median and trimmed mean inflation and had a much weaker relationship with macroeconomic conditions.
- The Bank of Canada adopted a weighted median and a trimmed mean as primary measures of core inflation in 2016, replacing their traditional core measure.

### Implication for policy
- The case for the Federal Reserve to move away from the traditional measure of core inflation has strengthened during 2020-21.
- Using outlier-exclusion gauges can improve assessment of underlying inflation pressures and their relation to economic slack, informing monetary policy decisions.

*Source: IMF Blog — "Median Inflation Gauge Offers Better Read on Price Trends" (February 14, 2022).*

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## References

- [food](https://blogs.imf.org/2021/06/24/four-facts-about-soaring-consumer-food-prices/)
- [energy](https://blogs.imf.org/2021/10/21/surging-energy-prices-may-not-ease-until-next-year/)
- [Our research shows](https://www.imf.org/en/Publications/WP/Issues/2021/12/17/Measuring-U-S-511054)
- [https://www.imf.org/wp-content/uploads/2022/02/Inflation-chart-COTW-measures-updated.jpg](https://www.imf.org/wp-content/uploads/2022/02/Inflation-chart-COTW-measures-updated.jpg)

_Source: https://www.imf.org/en/blogs/articles/2022/02/14/median-inflation-gauge-offers-better-read-on-price-trends_