Fed's Alternative Inflation Gauge Falls to Multi-Year Low
nashnova research
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.
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