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The Nonpuzzling Behavior of Median Inflation

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  • Laurence M. Ball
  • Sandeep Mazumder

Abstract

Economists are puzzled by the behavior of U.S. inflation since the Great Recession of 2008-2009, and many suggest that the Phillips curve relating inflation to unemployment has broken down. This paper argues that inflation behavior is easier to understand if we divide headline inflation into core and transitory components, and if core inflation is measured by the weighted median of industry inflation rates. This weighted median is less volatile than the traditional measure of core inflation, the inflation rate excluding food and energy prices, because it filters out large price changes in all industries. We illustrate the usefulness of the weighted median with a case study of inflation in 2017 and early 2018. We also show that a Phillips curve relating the weighted median to unemployment appears clearly in the data for 1985-2017, with no sign of a breakdown in 2008.

Suggested Citation

  • Laurence M. Ball & Sandeep Mazumder, 2019. "The Nonpuzzling Behavior of Median Inflation," NBER Working Papers 25512, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:25512
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    Cited by:

    1. Jim Dolmas & Evan F. Koenig, 2019. "Two Measures of Core Inflation: A Comparison," Review, Federal Reserve Bank of St. Louis, vol. 101(4).
    2. Laurence Ball & Sandeep Mazumder, 2021. "A Phillips curve for the euro area," International Finance, Wiley Blackwell, vol. 24(1), pages 2-17, April.
    3. Camila Figueroa & Jorge Fornero & Pablo García, 2019. "Hindsight vs. Real time measurement of the output gap: Implications for the Phillips curve in the Chilean Case," Working Papers Central Bank of Chile 854, Central Bank of Chile.
    4. Emmanuel De Veirman, 2022. "How Does the Phillips Curve Slope Vary with Repricing Rates?," Working Papers 735, DNB.
    5. Verbrugge, Randal & Zaman, Saeed, 2023. "The hard road to a soft landing: Evidence from a (modestly) nonlinear structural model," Energy Economics, Elsevier, vol. 123(C).
    6. Bańbura, Marta & Bobeica, Elena, 2023. "Does the Phillips curve help to forecast euro area inflation?," International Journal of Forecasting, Elsevier, vol. 39(1), pages 364-390.
    7. Laurence M. Ball & Mr. Daniel Leigh & Ms. Prachi Mishra & Mr. Antonio Spilimbergo, 2021. "Measuring U.S. Core Inflation: The Stress Test of COVID-19," IMF Working Papers 2021/291, International Monetary Fund.
    8. Matteo Luciani, 2020. "Common and Idiosyncratic Inflation," FEDS Notes 2020-03-05, Board of Governors of the Federal Reserve System (U.S.).
    9. Carlomagno, Guillermo & Fornero, Jorge & Sansone, Andrés, 2023. "A proposal for constructing and evaluating core inflation measures," Latin American Journal of Central Banking (previously Monetaria), Elsevier, vol. 4(3).
    10. Guillermo Carlomagno & Jorge Fornero & Andrés Sansone, 2021. "Toward a general framework for constructing and evaluating core inflation measures," Working Papers Central Bank of Chile 913, Central Bank of Chile.
    11. Alexander Doser & Ricardo Nunes & Nikhil Rao & Viacheslav Sheremirov, 2023. "Inflation expectations and nonlinearities in the Phillips curve," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 38(4), pages 453-471, June.
    12. Andrew Keinsley & Sandeep Kumar Rangaraju, 2021. "The Nonlinear Unemployment-Inflation Relationship and the Factors That Define It," Eastern Economic Journal, Palgrave Macmillan;Eastern Economic Association, vol. 47(3), pages 354-377, June.
    13. Conti, Antonio M., 2021. "Resurrecting the Phillips Curve in Low-Inflation Times," Economic Modelling, Elsevier, vol. 96(C), pages 172-195.
    14. Richard Ashley & Randal J. Verbrugge, 2019. "The Intermittent Phillips Curve: Finding a Stable (But Persistence-Dependent) Phillips Curve Model Specification," Working Papers 19-09R2, Federal Reserve Bank of Cleveland, revised 14 Feb 2023.
    15. Cepni, Oguzhan & Clements, Michael P., 2024. "How local is the local inflation factor? Evidence from emerging European countries," International Journal of Forecasting, Elsevier, vol. 40(1), pages 160-183.
    16. Oxana Babecka Kucharcukova & Jan Bruha & Petr Kral & Martin Motl & Jaromir Tonner, 2022. "Assessment of the Nature of the Pandemic Shock: Implications for Monetary Policy," Research and Policy Notes 2022/01, Czech National Bank.
    17. Saeed Zaman, 2019. "Cyclical versus Acyclical Inflation: A Deeper Dive," Economic Commentary, Federal Reserve Bank of Cleveland, issue September.
    18. Philippe Goulet Coulombe, 2022. "A Neural Phillips Curve and a Deep Output Gap," Working Papers 22-01, Chair in macroeconomics and forecasting, University of Quebec in Montreal's School of Management.
    19. Zhiyong Fan & Yushan Hu & Penglong Zhang, 2022. "Measuring China's core inflation for forecasting purposes: taking persistence as weight," Empirical Economics, Springer, vol. 63(1), pages 93-111, July.
    20. Eliana R. González-Molano & Ramón Hernández-Ortega & Edgar Caicedo-García & Nicolás Martínez-Cortés & Jose Vicente Romero & Anderson Grajales-Olarte, 2020. "Nueva Clasificación del BANREP de la Canasta del IPC y revisión de las medidas de Inflación Básica en Colombia," Borradores de Economia 1122, Banco de la Republica de Colombia.
    21. Ladi R. Bala-Keffi & Donald G. Mbaka & Nuruddeen Usman, 2020. "Alternative Core Inflation Measures in Nigeria: An Examination," Applied Economics and Finance, Redfame publishing, vol. 7(4), pages 112-120, July.
    22. Philippe Goulet Coulombe, 2022. "A Neural Phillips Curve and a Deep Output Gap," Papers 2202.04146, arXiv.org.
    23. Cristina Conflitti, 2020. "Alternative measures of underlying inflation in the euro area," Questioni di Economia e Finanza (Occasional Papers) 593, Bank of Italy, Economic Research and International Relations Area.
    24. Christian Garciga & Randal J. Verbrugge & Saeed Zaman, 2024. "The Effect of Component Disaggregation on Measures of the Median and Trimmed-Mean CPI," Working Papers 24-02, Federal Reserve Bank of Cleveland.
    25. Dunbar, Kwamie & Owusu-Amoako, Johnson, 2023. "Predicting inflation expectations: A habit-based explanation under hedging," International Review of Financial Analysis, Elsevier, vol. 89(C).

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    More about this item

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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