The Dallas Fed PCE Price Index was released and came in at +1.4% versus 2.7% last month. This is much lower than the headline PCE index of 3.7% and the core PCE of 3.3%. It is also the lowest level dating back to 2020.
This is good news.
What is the difference between the average PCE rate and the headline PCE level we saw earlier?
the The Federal Reserve Bank of Dallas reduced the average personal consumption expenditures inflation rate It is an alternative measure of inflation designed to filter out the “noise” created by unusually large price movements and provide a better picture of the underlying inflation trend.
Here’s how it works:
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It starts with the same data as the Fed’s preferred measure of inflation – the Personal Consumption Expenditures (PCE) price index.
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Instead of removing fixed categories (such as food and energy in core personal consumption expenditures), it removes extreme increases and decreases in prices each month, regardless of which category you belong to.
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After trimming those outliers, it calculates the inflation rate from the remaining components.
Why is it useful?
Inflation data can be distorted by one-time events:
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High prices for airline tickets.
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Gasoline prices collapse.
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Egg prices rise due to supply problems.
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Hotel prices jump due to a special event.
These moves can temporarily distort headline inflation. The Dallas Fed attempts to answer:
“What does inflation do with all the temporary fluctuations?”
So how is it different?
| Measures | What it excludes |
|---|---|
| PCE address | nothing |
| Basic personal consumption expenditures | Always exclude food and energy |
| The Dallas Fed reduced average personal consumption expenditures | Excludes the largest monthly price increases and reductions, regardless of category |
This means:
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If gasoline prices are stable, they remain in the account.
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If medical services suddenly jump by 10% in one month, they may be reduced.
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The cut categories change every month.
Why would the Fed be watching it?
Many economists believe it is one of The best measures of continuous inflation Because:
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Reduces monthly fluctuations.
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Less affected by temporary supply shocks.
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Historically, this has been a good indicator of future headline inflation.
For traders and investors:
- PCE address It tells you what consumers are experiencing.
- Basic personal consumption expenditures It removes food and energy, but can still be affected by other volatile classes.
- The Dallas Fed reduced average personal consumption expenditures It often provides the clearest view of underlying inflation momentum and is closely watched by many Fed officials when assessing whether inflation pressures are becoming persistent.
Yesterday, during his final testimony before Congress, Warsh spoke about alternative measures of inflation.
Here are Chairman Warsch’s key quotes on inflation measures from yesterday’s press conference:
“There is no easy target for inflation. There is no alternative target. There is only a 2% inflation target.”
When looking beyond a single measure of inflation:
“We look at a broader set of inflation measures than just the headline personal consumption expenditures index.”
Why:
“We want to understand the underlying trend of inflation, not just react to individual data points.”
These comments are consistent with what he said during his testimony before Congress earlier this month:
“The truncated average is my favorite measure of inflation.”
and:
“We have to improve how we measure the real rate of inflation in the US economy.”
The data released today is encouraging. It’s another step in the right direction and an important data point for the market to monitor. But one report will not be enough. This trend will have to continue before it materially changes inflation expectations. President Warsh appears to be leaning toward focusing more on measures of core inflation, but he has also made it clear that he wants more evidence before drawing firm conclusions about the best measure of inflation or the appropriate policy response.
Also remember… play the ball, not the referee.
