Trimmed mean inflation falls as Warsh’s Fed weighs price pressure
Dallas and Cleveland Fed gauges show cooler underlying prices, complicating a rate debate still focused on above-target inflation.
By Jordan Bell · Startups & Deals Reporter
· 3 min read
Trimmed mean inflation is giving Federal Reserve Chair Kevin Warsh a cooler read on prices just as the central bank faces pressure to do more against inflation. The signal matters for everyday investors because the Fed’s next rate moves feed into bond yields, borrowing costs and the way markets value future earnings.
The Dallas Fed’s trimmed mean gauge, which is based on the personal consumption expenditures price index, put June’s one-month annualized inflation rate at 1.4%, according to the Dallas Fed. That was down 1.3 percentage points from May and marked the lowest reading since November 2020.
On a 12-month basis, the Dallas Fed measure slipped to 2.2%, down 0.2 percentage point from the prior month and the lowest since July 2021. Fed officials tend to put more weight on longer stretches of data than a single monthly print.
Those readings sit much closer to the Fed’s 2% inflation goal than the standard inflation numbers released by the Commerce Department. The agency said the overall PCE price index fell 0.1% in June, helped by lower fuel costs, while core PCE, which excludes food and energy, rose 0.1%. From a year earlier, headline PCE was up 3.7% and core PCE rose 3.3%.
What is trimmed mean inflation?
Trimmed mean inflation removes the biggest price increases and the biggest price declines from the data, then measures what is happening across the middle of the basket. The goal is to reduce the effect of one-off moves, such as a sharp drop in fuel, that can make the main inflation rate look hotter or cooler than the broader trend.
The Dallas Fed’s version cuts out 24% of the lowest price-change readings and 31% of the highest readings before calculating its estimate. The Cleveland Fed runs a separate trimmed mean measure tied to the consumer price index, excluding readings outside the 8th and 92nd percentiles. Cleveland’s 16% trimmed mean CPI was 2.63% in June, the lowest unrounded reading since May 2021, according to the Cleveland Fed.
Citigroup economist Andrew Hollenhorst said in a note that trimmed mean data “should also now fall closer to target-consistent rates.” He added that a broad set of indicators points to underlying inflation still slowing toward the Fed’s goal, a point he said has more weight given Warsh’s interest in reviewing a wider range of inflation measures.
Why the Fed is still split on inflation
The cooler trimmed mean readings have not settled the policy debate. Dallas Fed President Lorie Logan, whose bank produces one of the measures, has warned that the current mix of price moves may be causing the trimmed mean to exclude too many increases. She said that effect likely makes the gauge look lower than the actual inflation trend.
Logan dissented from the Federal Open Market Committee’s decision this week to hold its benchmark rate steady, saying she preferred a quarter-point increase. In a Friday statement, she said inflation appears to be moving toward the mid-2% range rather than all the way back to 2%, even after accounting for productivity gains and temporary supply shocks.
Minneapolis Fed President Neel Kashkari and Cleveland Fed President Beth Hammack also dissented, saying inflation remains too high and the central bank should act now rather than wait. CNBC reported that bond yields rose sharply this week, especially longer-term yields, as investors focused on the headline inflation data and the Fed’s choice not to raise rates.
Warsh has signaled only limited comfort with the inflation path. He pointed to some encouraging production signs but said the Fed still has work ahead, adding that no FOMC member thinks more than five years of above-target inflation can be fixed in nine weeks or by one month of modest price declines.
This story draws on original reporting from CNBC.
