Improving the Median CPI: Maximal Disaggregation Isn't Necessarily Optimal

RePEc Short ID: pve29
ORCID iD: 0000-0003-0276-447X

Garciga, Christian; Verbrugge, Randal J.; Zaman, Saeed

doi:10.26509/frbc-wp-202402r2

Working Paper Revision

Improving the Median CPI: Maximal Disaggregation Isn't Necessarily Optimal

Abstract: Median Consumer Price Indexes have proved useful in many contexts and are used worldwide as key policymaking inputs. Historically, US Median CPI improvements involved increasing the CPI component level of disaggregation; one might reasonably assume that further disaggregation would lead to further improvements. We theoretically demonstrate herein: not necessarily. We then empirically explore the impact of further disaggregation. Substantially more disaggregation in the shelter indexes and slightly more disaggregation in the remaining components improve the ability of Median CPI to track the medium-term trend in CPI inflation and its predictive power for future CPI movements. This new Median CPI suggests that trend inflation was lower pre-pandemic, accelerated faster in 2021, and decelerated faster after 2022.

JEL Classification: C8; E31; E37; E52;

https://doi.org/10.26509/frbc-wp-202402r2