As Warsh’s Fed faces pressure to act on inflation, these indicators show it’s at its lowest in years
Trimmed mean measures are painting a different picture than the headline numbers.
Inflation data from June indicates that it is trending back towards the Federal Reserve's target, according to trimmed mean measures. The Dallas Fed's measure, for example, shows a one-month annualized rate of 1.4% in June, down 1.3 percentage points from May and at its lowest level since November 2020. The 12-month rate dipped to 2.2%, down 0.2 percentage points from the previous month, marking a bottom not seen since July 2021.
Fed officials stress that they do not focus on one month of any data point, but the trend in the trimmed mean could attract attention. Citigroup economist Andrew Hollenhorst notes that trimmed mean data should align closer to target-consistent rates, given Chair Kevin Warsh's intention to examine how the central bank views inflation and the data points it uses.
The trimmed mean essentially acts as a teacher grading on a curve, discarding outliers in price increases and decreases to determine a midpoint inflation level. While the trimmed mean could receive more prominence on the Fed's dashboard under Warsh, there are caveats. Dallas Fed President Lorie Logan warns against reading too much into the trimmed mean due to compositional factors causing it to drop too many increases.
She believes inflation is closer to the mid-2s rather than 2%, and risks are to the upside. Markets reacted to the headline inflation numbers, with bond yields surging, particularly at the long end of the duration curve, and Chair Warsh expressing cautious confidence in inflation's trajectory.
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