Thursday, June 18, 2009

Deflation?

Click on the graphic to enlarge.

The above graph, from the Cleveland Fed, shows inflation as gauged by the consumer price index and by a measure called the median CPI. As every grade school student learns when the teacher reports results of the latest test, the average of any data set can be thrown off by a few extreme outliers; the median is a more robust statistic to estimate the central tendency in the data.

Right now, the two measures of inflation are diverging substantially. The standard CPI shows deflation over the past year, but that average is due to a few anomalous sectors, such as energy. If you look at the median CPI, which shows what a more typical price is doing, the inflation rate does not look very unusual.