Is a Nonseasonally Adjusted Median CPI a Useful Signal of Trend Inflation?

Amy Higgins () and Randal Verbrugge

Economic Commentary, 2015, issue Nov

Abstract: Since controlling inflation is a central monetary policy goal, monetary policymakers focus intently on inflation signals. But they face a major difficulty: inflation data contain a lot of transitory shocks. The presence of the transitory ?noise? in inflation data makes it difficult to detect early warnings of sustained movements. Responding to these transitory shocks would be a bad idea, because doing so would translate into policy swings and reversals and introduce uncertainty and volatility into the economy. Instead, policymakers attempt to respond to the sustained movements in inflation?that is, to underlying trend inflation. Discerning the underlying trend in the midst of the noisy inflation data is a challenging task.

Date: 2015
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