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Dallas Trimmed Mean

A means of measuring core inflation in the price index for Personal Consumption Expenditures

What is the Dallas Trimmed Mean?

The Dallas Trimmed Mean, popularly known as the Trimmed Mean PCE Inflation Rate, is a means of measuring core inflation in the price index for Personal Consumption Expenditures (PCE). It is called the Dallas Trimmed Mean because it is estimated by the staff at the Federal Reserve Bank of Dallas. The data for the same is stored and produced by the Bureau of Economic Analysis (BEA).

 

Dallas Trimmed Mean

 

What is Core Inflation?

Core inflation involves changes in the costs of goods and services, excluding the food and energy sectors. The two sectors are excluded due to the highly volatile nature of their markets and prices. Core inflation is an indicator of the prevailing long-term inflation in the economy. The three methods used to estimate core inflation include:

  • Consumer Price Index (CPI)
  • Personal Consumption Expenditures Index (PCE)
  • The Outliers method

 

What is Personal Consumption Expenditures (PCE)?

Personal Consumption Expenditures (PCE), generally referred to as the PCE Index, measures changes in the prices of consumption expenditure, i.e., consumer goods and services. It is a price index, similar to the avidly used Consumer Price Index (CPI). The PCE Index provides insights on consumer habits of households and the overall consumption expenditure pattern of the economy.

 

Calculation of the Trimmed Mean PCE Inflation Rate

The Trimmed Mean PCE Inflation Rate for a given month is calculated by carefully observing the price changes for each individual component of PCE. The individual price changes are then arranged in ascending order from the price that declined the most to the price that rose the most.

From the arranged ascending order, a certain section or part of the most extreme observations are “trimmed,” i.e., eliminated. Then, the inflation rate is finally calculated as a weighted average of the final observation list that was previously arranged in ascending order after the necessary eliminations.

 

Advantages of Using the Dallas Trimmed Mean

The Dallas Trimmed Mean method is receptive to the short-term price variations that affect core inflation. It makes the Dallas Trimmed Mean a very accurate measure for estimating or tracking the long-term price variations affecting the core inflation. It also helps formulate Federal Reserve policies as it can assist in the long-term financial planning for the economy without worrying too much about short-term price fluctuations that can affect the analysis.

 

Related Readings

CFI offers the Financial Modeling & Valuation Analyst (FMVA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following resources will be helpful:

  • Expansionary Monetary Policy
  • Growth Accounting Equation
  • Purchasing Power Parity
  • Stagflation

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