We think that with the sharp decline in oil prices, top-line inflationary growth has peaked.
Core pressures amid sticky service sector prices, AI-inspired competition for scarce resources and the coming increase in demand for tech and industrial supplies from the U.S. defense replenishment will most likely keep pricing pressures from fading anytime soon.
This dynamic should result in a reassessment of risk to the economic outlook through the core inflation channel.
It is probable that investors will be looking a bit closer at alternative measures like the Dallas Fed PCE trimmed mean, which is one of Fed Chair Kevin Warsh’s preferred inflation metrics.
Get Joe Brusuelas’s Market Minute commentary every morning. Subscribe now.
The next update of that inflation measure will be early next week. The trimmed mean sits at 2.4% and should increase modestly in the May reading.
The Dallas Fed metric, along with the Cleveland Fed CPI trimmed mean and other alternative measures like the Billion Prices Project, are indicators of potential breaks in underlying inflation trends.
One of the interesting aspects of the Dallas Fed measure is that it excludes roughly 55% of price changes each month—31% of higher inflation products and 24% of low inflation items—which limits its effectiveness during times of potential regime shifts in inflation.
The primary criticism of the Dallas Fed trimmed mean is that it tends to understate inflation during supply shocks like the one that is taking place.
We expect at the next Fed press conference that the financial media will press Warsh on the shortcomings of such an asymmetric metric.
A look at that metric versus a series of alternatives presented here strongly suggests that is occurring in real time.
While top-line inflation has most likely peaked—core inflation may be another story given the recent pipeline pressures inside producer prices—one should be cautious moving forward as it will most likely be some time before inflation gets back to prewar levels near 2.5%, much less the Fed’s 2% target.
