Dallas Fed Trimmed Mean: No Sign of Rising Inflationary Pressures

Dallas Fed's trimmed Mean Inflation index is designed to smooth out the irrelevant short term fluctuations in the inflation data, while focusing on the long-term trends that are of great significance for both fx trading and economic policy at the highest level. Traders keep an eye on this measure of inflation in order to determine the stickiness of price pressures, and for achieving a more concise analytical picture.

After picking up slightly in the first half of this year, the 12-month trimmed mean PCE inflation index appears to be in a firm downtrend, with the most recent data relating to November 2009 coming at a meager 1.3%, way below the Fed's benchmark of 2%. Inflation has been falling at a rate of about 0.1 percent every month since June of this year. In contrast, the one-month PCE numbers are highly volatile, while the 6-month trimmed mean inflation index fully confirms the trends observed in the yearly data.

When we examine the breakdown of inflation by percentage range, we note that between November 2008, and November 2009, the percentage of expenditure that was subject to price rises fell from 80 percent of total spending to just 60. In other words, in the latest period of measurement, only 60 percent of the goods and services included in the PCE index evinced any price rise at all. Interestingly, the proportion of items subject to the highest price rises at over 10 percent actually rose during this period, perhaps in testimony to the inevitable pass-through effect of commodity price trends, and other factors that pressure corporate balance sheets. Yet this group constitutes less than 10 percent of total consumer expenditure, and its impact on the consumer's balance sheet is therefore limited.

We believe that the overall analysis confirms the existence of price pressures which are tempered, and even overwhelmed by falling demand, and limited optimism on the part of the consumer. At least as far as the available data is concerned, there is no justification to the expectation that the Fed will be raising rates any time soon, and all price movements that arise from speculation to that effect may be regarded as counter-trend trading opportunities.

Traders are faced with significant challenges in the ongoing uncertainty about the future of the global economy. There is a strong case to be made about the historic resilience of U.S. consumers to economic shocks, but it is also the case that the events of the recent years have surpassed anything that we have experienced since the oil shock of the 70s. A mix of caution, and patience is perhaps the best attitude that can be adopted by a forex trader at this stage, notwithstanding the constant speculation about ground-breaking changes observed in the market. It may be that right now is the time to test the different forex

brokerage services in the market without making serious commitments, while preparing for the clouds to dissipate and the future trends to clarify.