Inflation Detour: Trimmed Mean PCE

Today’s release by the Federal Reserve Bank of Dallas of October’s Trimmed Mean Personal Consumption Expenditure gives us a chance to check this “alternative measure of core inflation.”

The clearest thing is that it does what the FRB Dallas intends: generally reduces the measure of inflation:

For the graphic above, any value above the line shows where the 12-month Average of the Trimmed Mean PCE is greater that the Annualised CPI for that same period. With few exceptions, those points are places where the actual CPI is negative for the period. (Note also that all of periods where CPI is over 5.0-5.5% are below the line. While the 12-month average of Trimmed Mean PCE has a maximum of 8.7%, while CPI reaches slightly over 14.75% in the same time period.)

So the natural next step is to compare it to a measure of Consumer Sentiment. Let’s do that below the fold

Comparing Trimmed Mean PCE to the University of Michigan Index previously referenced:

Again, the preponderance of data points are to the right of the line, indicating that the Michigan Consumer Inflation Expectations is higher than the monthly Trimmed Mean PCE. But there is much more balance: the largest cluster of Expectations Dominance is between 2 and 4%; that is, periods of normal inflation.

The two measures correlate rather well with each other (86.13%) while a simple fitted regression that excludes a constant term has an adjusted R-Squared of 94.1% and yields MICH = 1.0416*Trimmed Mean PCE.

Trimmed Mean PCE may well understate inflation, but it appears to compare fairly well with what people think of when they think about inflation.

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