Inflation may be cooling more broadly than headline figures suggest, according to alternative measures that filter out extreme price movements in either direction.
So-called trimmed mean indicators, which strip out outliers in both price increases and decreases, are now sitting at their lowest levels since the early part of this decade.
The Dallas Fed’s trimmed mean measure put the one-month annualized rate for June at just 1.4%, down a significant 1.3 percentage points from May and the lowest reading since November 2020.
The 12-month rate, which Fed policymakers watch more closely, dipped to 2.2%, down 0.2 percentage point from the prior month and the lowest since July 2021.
These alternative gauges work similarly to grading on a curve, with the Dallas measure discarding 24% of lower-end price readings and 31% at the high end to identify a cleaner midpoint.
The measure relies on the personal consumption expenditures price index, the Fed’s primary inflation forecasting tool, which showed the all-items index fell 0.1% for June while the core level gained 0.1%.
The Cleveland Fed’s “16% trimmed mean,” which uses the consumer price index as its benchmark, showed a trimmed CPI reading of 2.63% for June, the lowest on an unrounded basis since May 2021.
Citigroup economist Andrew Hollenhorst said trimmed mean data “should also now fall closer to target-consistent rates,” noting the broader significance of the trend under the current Fed leadership.
“The fact that underlying inflation is still slowing toward target is now even more relevant given Chair Warsh’s suggestion that he would analyze inflationary pressure by looking across a broad range of metrics,” Hollenhorst added.
Hollenhorst also wrote, “We expect markets to price-out rate hikes in coming months on inflation data, and price-in cuts if the unemployment rate rises as we project.”
However, Dallas Fed President Lorie Logan has cautioned against reading too deeply into her bank’s own trimmed mean measure, pointing to significant compositional factors currently at play.
Logan said researchers found “that a change in the mix of price increases and decreases is causing the trimmed mean to drop too many increases right now,” adding the effect “likely makes the trimmed mean lower than the true inflation trend.”
Logan this week dissented from the Federal Open Market Committee’s decision to hold its benchmark rate steady, preferring a quarter percentage point increase to combat persistently above-target inflation.
“Even after accounting for productivity gains and temporary supply shocks, inflation appears to be trending toward the mid-2’s, not all the way to 2 percent, and the risks are to the upside,” Logan said in a statement.
Logan was joined in her dissent by regional presidents Neel Kashkari of Minneapolis and Beth Hammack of Cleveland, both of whom argued the Fed should act now rather than wait.
Bond markets reacted sharply to the Fed’s decision to hold rates, with yields surging particularly at the long end of the duration curve where investors price in future growth and inflation expectations.
Fed Chair Kevin Warsh expressed only measured confidence in the current inflation trajectory, acknowledging some positive signs from production but insisting much work remains ahead for the central bank.
“Not one of my FOMC colleagues is under any illusion,” Warsh said. “We have begun a new chapter, and we understand that the five-plus years of inflation above target cannot be cured in nine weeks — or by a single month of modest price decreases.”
The trimmed mean data could gain more prominence on the Fed’s analytical dashboard given Warsh’s stated intention to broaden the range of metrics the central bank uses to assess inflationary pressure.
Whether these alternative indicators shift Fed policy in any meaningful way remains to be seen, particularly as dissenting voices within the committee continue pushing for more aggressive action on inflation.
