Fed's Mike Bryan: "Torturing CPI Data until They Confess"

Every month I post a few key measures of inflation including the Atlanta Fed's median CPI and trimmed-mean CPI, along with core CPI and core PCE. Atlanta Fed senior economist Mike Bryan and his colleagues developed these two measures.



Here is a very informative post on inflation today from Mike Bryan: Torturing CPI Data until They Confess: Observations on Alternative Measures of Inflation

Why do price change distributions have peaked centers and very elongated tails? ... absent a clear economic rationale for this unusual distribution, it presents a measurement problem and an immediate remedy. The problem is that these long tails tend to cause the CPI (and other weighted averages of prices) to fluctuate pretty widely from month to month, but they are, in a statistical sense, tethered to that large proportion of price changes that lie in the center of the distribution.



... The median CPI is immune to the obvious analyst bias that I had been guilty of, while greatly reducing the volatility in the monthly CPI report in a way that I thought gave the Federal Reserve Bank of Cleveland a clearer reading of the central tendency of price changes.



Cecchetti and I pushed the idea to a range of trimmed-mean estimators, for which the median is simply an extreme case. Trimmed-mean estimators trim some proportion of the tails from this price-change distribution and reaggregate the interior remainder. Others extended this idea to asymmetric trims for skewed price-change distributions, as Scott Roger did for New Zealand, and to other price statistics, like the Federal Reserve Bank of Dallas's trimmed-mean PCE inflation rate.



How much one should trim from the tails isn't entirely obvious. We settled on the 16 percent trimmed mean for the CPI (that is, trimming the highest and lowest 8 percent from the tails of the CPI's price-change distribution) because this is the proportion that produced the smallest monthly volatility in the statistic while preserving the same trend as the all-items CPI.

from Calculated Risk http://ift.tt/1uZ05R8

via YQ Matrix