Dallas Trimmed Mean

The Dallas Trimmed Mean or trimmed mean PCE inflation rate is an economic measure to compute the core inflation in the Personal Consumption Expenditure (PCE) price index. This approach helps reveal the underlying inflationary trends in the economy by reducing the impact of extreme values.

The method is called Dallas Trimmed Mean since it is computed using data from the Bureau of Economic Analysis (BEA). This data is based on input from staff at the Dallas Federal Reserve. Also, it is a core inflation measure, i.e., it does not include price changes in volatile commodities like agriculture and energy sector products.

• Dallas Trimmed Mean is a statistical metric to determine the prevailing core inflation rate based on the Personal Consumption Expenditure (PCI) price index.
• It gauges underlying inflationary trends and aids policymakers, politicians, and economists in making monetary and fiscal policy decisions to stabilize the economy.
• The trimmed mean PCE inflation rate is a reliable and consistent measure that does not account for goods or services like food and energy sector items.
• It eliminates the extreme price points after arranging the PCE commodities' price data in ascending order. The weighted average is derived from the remaining values.

The Dallas Trimmed Mean is an alternative method of calculating inflation based on the Personal Consumption Expenditures Price Index (PCE) using a trimmed mean approach. PCE is a critical metric that assesses consumer spending on domestic goods or services. It has a considerable impact on the US gross domestic product (GDP). The PCE price index is a parameter that identifies the change in the price of goods and services (inflationary or deflationary) and the responsive behavioral shift in consumer spending.

Various nations' central banks, including the Federal Reserve, constantly emphasize the need to control inflation. Thus, the trimmed mean PCE inflation rate measure is commonly used to analyze price changes and inflation in the United States. It aids the central bank and the government in implementing corrective actions and policy changes (expansionary or contractionary) according to the economic conditions prevailing in the nation.

Moreover, it excludes a certain percentage of extreme values from both ends of the distribution of the PCE price index. By removing these outliers or volatile price movements, the trimmed mean provides a more stable and less influenced measure of inflation. The specific percentage of values trimmed can vary depending on the methodology used.

The Dallas Trimmed Mean PCE can be secured through official sources such as the Bureau of Economic Analysis (BEA) or the Federal Reserve. However, various other statistical measures are used by policymakers and analysts along with the Dallas Trimmed Mean to gain a comprehensive understanding of the inflationary environment.

The Dallas Trimmed Mean is estimated monthly through the following process:

1. Observe the price fluctuation of every Personal Consumption Expenditure (PCE) component over the period under scrutiny.
2. Rank these price changes in ascending order, i.e., from the highest to the lowest values.
3. Exclude the extreme values at the upper and lower tails of the arranged series of price observations.
4. Evaluate the weighted average of the trimmed data set to compute the inflation rate.

The following examples explain the concept and its application further.

Example #1

The Dallas Fed Trimmed Mean is currently 4.39%, as evaluated in April 2023. Also, the one-year figures show significant ups and downs in the inflation rate in the US. While it was as low as 3.09% in April 2022, the inflation rate was highest in June 2022 at 7.17%. The chart below published by FRED (economic data) shows these changes.

Source 

Example #2

In March 2023, the inflation annualized on the trimmed mean was 3.4% when evaluated using the Dallas Trimmed Mean method. It was considerably lower than the February figure of 4.6%. However, the 12-month trimmed mean remained constant at 4.7%. Auto, rentals, fruit, eggs, used trucks, gasoline, hotels, childcare, motor vehicle leasing, and hospital services were excluded from the PCE computation. Some substantial numbers included in the trimmed mean were:

• Owner-occupied homes +6.0% (this was 11% of the PCE index)
• Vehicle maintenance and repair +4.0%
• Prescription drugs +1.7%
• Physician services +1.1%

Through this indicator, it is possible to track price variations over a long period of time and compare them for a detailed analysis of several economic phenomena affecting the US economy.

The Dallas Trimmed Mean inflation rate offers several benefits as a statistical measure of core inflation:

1. Reflects Underlying Inflation Trend: By focusing on the middle of the ascending distribution, this method captures the changes in prices for most goods and services, indicating a clear reflection of the prevailing inflation.
2. Robust Measure: The Dallas Trimmed Mean is less sensitive to extreme values than other measures, such as the median or mean. As a result, it is less likely to be influenced by extreme data points, making it more representative of the central tendency of the data.
3. Reduces Outliers: By excluding extreme values, the trimmed mean inflation rate minimizes the effect of temporary shocks or data collection errors that can distort the overall inflation measure, providing a more accurate picture of underlying inflationary trends.
4. Smoothing Effect: This approach reduces short-term fluctuations in the inflation rate, which can otherwise occur due to temporarily volatile factors like energy or food prices. Also, it is majorly concerned with labor-market slack, making it a more reliable alternative inflation metric.
5. Enables Comparability: As it is a more consistent and reliable estimate of core inflation that results in measurable values, it facilitates the comparison of inflation rates over time and across different economies.
6. Serves as a Crucial Policy Tool: It is one of the critical alternative inflationary measures used by economists, policymakers, and the government to make expansionary or contractionary policy implementation decisions.

This has been a guide to What is Dallas Trimmed Mean. Here, we explain how to calculate it, explain its examples, and advantages. You can learn more about it from the following articles -

• Mean
• Sample Mean vs Population Mean
• Dispersion