Key Takeaways:
A key regional inflation gauge tracked by the Federal Reserve Bank of Dallas cooled more than expected in April, reinforcing the disinflation narrative ahead of the national Personal Consumption Expenditures price index release.
The Dallas Fed's 12-month trimmed mean PCE price index rose 2.5% year over year in April, down from 2.9% in March, data released Tuesday showed. The 0.4 percentage point decline marks the largest monthly deceleration in the gauge since late 2024 and brings it to its lowest level in more than a year.
"The trimmed mean is telling us that underlying inflation pressures are fading faster than the headline numbers suggest," said James Okafor, macro analyst at Edgen. "When you strip out the volatile components, the disinflation trend is intact and arguably accelerating."
The trimmed mean measure excludes extreme price movements in both directions, offering a cleaner read on the inflation trend than the headline PCE index. The Dallas Fed's gauge has now fallen 0.7 percentage points from its recent peak of 3.2% in January, a trajectory that could bolster the case for the Federal Reserve to begin easing policy sooner than markets currently price.
The national PCE price index, the Fed's preferred inflation measure, remained elevated in April, according to Commerce Department data released Friday. The headline index rose 0.3% month over month, keeping the annual rate above the Fed's 2% target. Core PCE, which excludes food and energy, advanced at a 2.8% annual pace, matching the prior month's reading.
The divergence between the Dallas Fed trimmed mean and the national headline PCE highlights the impact of volatile components — particularly energy prices — that have kept the broader index sticky. Oil prices spiked in April after geopolitical tensions in the Middle East escalated, pushing gasoline costs higher and temporarily masking the underlying disinflation in services and core goods.
The last time the Dallas Fed trimmed mean PCE registered a comparable deceleration was in the second half of 2024, when the gauge fell from 3.1% to 2.6% over a four-month period. That disinflation phase preceded the Fed's initial rate cut in September 2024, when policymakers delivered a 50-basis-point reduction. The current trajectory suggests a similar pattern may be emerging, though the pace of improvement in the national data will determine the timing of any policy response.
For the Fed, the April trimmed mean reading provides a counterweight to the stickier national PCE data. Chair Jerome Powell and his colleagues have emphasized they need to see "greater confidence" that inflation is sustainably moving toward 2% before cutting rates. The Dallas Fed gauge, which is less distorted by energy price swings, offers evidence that the underlying trend is moving in the right direction even if the headline numbers remain elevated.
Markets are currently pricing a 45% probability of a rate cut at the Fed's June 17-18 meeting, according to CME FedWatch data, down from 60% a month ago after the stronger-than-expected national PCE print. The trimmed mean data could shift those odds if the trend continues into May.
The Dallas Fed's trimmed mean PCE is one of several regional inflation measures that policymakers monitor alongside the national data. The Cleveland Fed's median CPI and the Atlanta Fed's sticky-price CPI provide complementary reads on the inflation landscape. All three measures have shown improvement in recent months, though at varying paces.
This article is for informational purposes only and does not constitute investment advice.
