Pricing data for June suggests inflation is trending back toward the Federal Reserve’s target, at least according to a set of alternative measures gaining renewed attention.
So-called trimmed mean indicators, which strip out outliers at both ends of price readings, are showing inflation at its lowest point since the early part of the decade.
The Dallas Fed’s trimmed mean measure put the one-month annualized rate for June at just 1.4%, a drop of 1.3 percentage points from May and the lowest reading since November 2020.
The 12-month rate, which policymakers tend to watch more closely, dipped to 2.2%, down 0.2 percentage points from the prior month and the lowest since July 2021.
Fed Chairman Kevin Warsh has signalled his intention to reexamine how the central bank assesses inflation and which data points it relies upon, lending fresh relevance to these alternative gauges.
Citigroup economist Andrew Hollenhorst said trimmed mean data “should also now fall closer to target-consistent rates,” adding that underlying inflation’s continued slowdown is especially significant given Warsh’s stated approach.
“The fact that underlying inflation is still slowing toward target — as indicated by a broad set of indicators — 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 said.
“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,” he added.
The Dallas Fed’s trimmed mean works by discarding 24% of the lowest price readings and 31% of the highest, aiming to produce a cleaner midpoint that removes distortions caused by outliers.
The measure draws on the personal consumption expenditures price index, the Fed’s primary inflation tool, which showed the all-items index fell 0.1% for the month on the back of falling fuel costs, while the core reading gained 0.1%.
On an annual basis, the all-items and core PCE gauges rose 3.7% and 3.3% respectively, figures that remain well above the Fed’s 2% target and complicate the picture painted by trimmed mean readings.
The Cleveland Fed also operates a “16% trimmed mean” based on the consumer price index, which came in at 2.63% for June, representing on an unrounded basis the lowest level since May 2021.
Despite the encouraging signals from these alternative measures, significant caution has been urged by some of the officials who oversee them.
Dallas Fed President Lorie Logan, whose institution produces its own trimmed mean, warned that researchers have found “that a change in the mix of price increases and decreases is causing the trimmed mean to drop too many increases right now.”
“This effect likely makes the trimmed mean lower than the true inflation trend,” Logan said, urging restraint in drawing conclusions from the recent readings.
Logan dissented from the Federal Open Market Committee’s decision to hold its benchmark rate steady, preferring a quarter percentage point increase to tackle inflation that has run above target for more than five years.
“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,” she said in a statement.
Logan was joined in her dissent by Minneapolis Fed President Neel Kashkari and Cleveland Fed President Beth Hammack, both of whom argued the Fed should act on inflation now rather than wait.
Bond markets also reflected unease this week, with yields surging, particularly at the long end of the curve where investors price in future growth and inflation expectations.
Chairman Warsh himself struck a measured tone, acknowledging some positive signs from production but insisting the central bank still has considerable work ahead.
“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.”