Fed's Alternative Inflation Gauge Falls to Multi-Year Low
Alina Collins
Two trimmed-mean inflation measures tracked by the Fed dropped to their lowest levels in years in June, but hawks warn the gauges may understate true price pressure — the Fed itself is split on whether inflation is actually retreating.
What is a trimmed-mean inflation gauge?
A trimmed mean strips out the items with the biggest price swings — both up and down — and averages only the middle. In plain terms = it is a noise filter for inflation data, so a single oil-price crash or airfare spike cannot distort the picture.
The Dallas Fed version cuts the lowest 24% and highest 31% of price-change items, using the Fed's preferred PCE price index as its base.
This reflects the Fed's multi-gauge approach to measuring inflation — the trimmed mean is considered one of the least noisy thermometers in the toolkit.
What did the June data show?
Dallas Fed trimmed-mean PCE: the one-month annualized rate fell to 1.4%, down 1.3 percentage points from May — the lowest since November 2020. The 12-month rolling rate dropped to 2.2%, the lowest since July 2021.
Cleveland Fed 16% trimmed-mean CPI: June reading at 2.63%, a new low since May 2021.
Official PCE data for the same month: headline month-over-month −0.1% (dragged down by a sharp fuel-price drop), core PCE +0.1%; year-over-year at 3.7% and 3.3%, respectively.
This means → every gauge pointed to decelerating inflation in June, yet year-over-year readings remain above the 2% target — the direction is right, the destination is not reached.
Why does the Warsh framework make this data matter more?
Fed Chair Kevin Warsh has signaled he will assess inflation through a broader set of indicators, not a single number. This means → alternative thermometers like trimmed means could carry more weight under the new framework.
Citi economist Andrew Hollenhorst argued the trimmed-mean readings "should now also be closer to levels consistent with the target," and predicted markets will gradually unwind rate-hike expectations in coming months, then start pricing in cuts once unemployment rises as he forecasts.
Warsh himself was cautious: "More than five years of above-target inflation cannot be resolved in nine weeks — or by a single month of mild price decline."
Why aren't the hawks convinced?
Dallas Fed President Lori Logan — who heads the very institution that produces the trimmed-mean gauge — warned directly: shifts in the composition of price changes are causing the trimmed mean to strip out too many rising-price items, potentially pushing the reading below the true inflation trend.
In plain terms = the noise filter may be cutting in the wrong place right now, discarding genuine price-increase signals along with the noise.
Logan voted in favor of a 25-basis-point rate hike at the July meeting, joining Minneapolis Fed President Neel Kashkari and Cleveland Fed President Beth Hammack in a three-vote hawkish dissent. She stated inflation "appears to be trending toward the mid-2% range, not all the way back to 2%, with risks tilted to the upside."
How did markets react, and what comes next?
The Fed ultimately held rates steady, but markets responded sharply: bond yields surged, especially at the long end — investors repriced the medium-to-long-term growth and inflation outlook.
This means → markets are not fully convinced inflation has turned the corner. The rise in long-term yields signals that capital is hedging against the possibility that inflation proves stickier than expected.
The key variable ahead: whether the trimmed-mean gauges gain greater weight under Warsh's new framework, and whether the hawks' critique of their downward bias gets formally incorporated into the policy discussion.
Content is for reference only, not financial advice.