Dallas Fed introduces improved consumer price inflation gauge

For immediate release: August 2, 2005

DALLAS— The Federal Reserve Bank of Dallas has developed a new core consumer price inflation gauge—called the Trimmed-Mean PCE inflation rate—to provide a more accurate picture of inflation rate trends for the Commerce Department’s Personal Consumption Expenditures (PCE) index.

The Dallas Fed inflation gauge is the first of its kind for the PCE, which is well known among business analysts and is the Federal Reserve Board’s preferred measure of consumer price inflation. The usual core PCE excludes all food and energy prices; however, the Trimmed-Mean PCE takes a more discriminating approach to the choice of which goods and services to include or exclude, rather than simply throwing out all food and energy prices.

“An increase in the price of oranges might tell us a lot about weather in Florida but not much about long-run trends in consumer prices,” according to Jim Dolmas, the Dallas Fed economist who developed the new measure. “An increase in the price of taking the family out to dinner, however, usually tells us a good deal about the trend in consumer prices. The Trimmed-Mean PCE correctly ignores the oranges but pays attention to the restaurant bill. The usual core PCE inflation rate would ignore both.”

Dolmas’ research—which draws upon techniques developed for the Consumer Price Index by economists at the Federal Reserve Bank of Cleveland—demonstrates the substantially increased accuracy of the Trimmed-Mean PCE in tracking trends in overall PCE inflation.

“While there are a number of alternative measures of core inflation for the Consumer Price Index, the new Dallas Fed inflation gauge is the first of its kind for the PCE,” Dolmas said.

For the month of June, the Trimmed-Mean PCE inflation rate was an annualized 1.4 percent. Over the past 12 months, it has averaged 2.1 percent.

By comparison, the conventional core PCE inflation rate released today by the Commerce Department’s Bureau of Economic Analysis was 0.5 percent in June and 1.9 percent on a 12-month basis.

More information—and regular monthly updates—can be found at www.dallasfed.org.

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Media contact:
James Hoard
Phone: (214) 922-5307
e-mail: james.hoard@dal.frb.org