Why the Federal Reserve’s Alternative Measurement Shows Inflation Is Falling Fast

2026-08-01 economy

Washington, Saturday, 1 August 2026.
The Dallas Fed’s trimmed mean inflation rate dropped to 1.4% in June 2026, reaching its lowest level since 2020 and offering central bankers evidence of cooling underlying price pressures.

Divergence in Inflation Metrics

While headline figures remain elevated, the one-month annualized trimmed mean inflation rate recorded by the Dallas Federal Reserve fell to 1.4% in June 2026, representing a significant decrease from the 2.7% observed in May 2026 [1][2]. This 1.3 percentage point drop marks the lowest level for this specific metric since November 2020, suggesting that extreme price volatility in specific categories is masking a broader cooling trend [1][2]. In contrast, the annual Personal Consumption Expenditures (PCE) price index rose 3.7% in June, while the core index, which excludes food and energy, rose 3.3% [1][7]. The 12-month trimmed mean inflation rate also dipped to 2.2% in June, creating a gap of 1.5 percentage points between headline and underlying inflation measures [1][3]. This specialized measure strips out extreme price volatility to suggest underlying inflationary pressures are moderating more significantly than traditional indicators reflect [1]. The Dallas Fed Trimmed Mean PCE is utilized by economists and Federal Reserve officials to identify underlying inflation trends by filtering out temporary volatility from events like airline fare surges or gasoline price collapses [2].

Federal Reserve Policy Division

On July 29, 2026, the Federal Open Market Committee (FOMC) decided to keep benchmark interest rates steady, though the decision was not unanimous [1][7]. The committee concluded its July 2026 meeting with a 9-3 vote to maintain steady interest rates, featuring three dissents pushing for a rate hike, the most since 2016 [7]. Dallas Fed President Lorie Logan, Minneapolis Fed President Neel Kashkari, and Cleveland Fed President Beth Hammack dissented, preferring a 0.25 percentage point increase [1]. Logan noted that a change in the mix of price increases and decreases is causing the trimmed mean to drop too many increases right now, suggesting the metric might be lower than the true inflation trend [1]. Conversely, Federal Reserve Chair Warsh emphasized during a press conference on July 28, 2026, that there is no soft target for inflation and only a 2% inflation target [2]. Warsh stated that the Federal Reserve is looking at a broader set of inflation measures than simply the headline PCE to understand the underlying trend [2]. Citigroup economist Andrew Hollenhorst noted that trimmed mean data should now fall closer to target-consistent rates, influencing expectations that markets will price-out rate hikes in coming months [1].

Broader Economic Context

Beyond inflation metrics, the broader economic landscape shows signs of slowing growth alongside persistent price pressures. US economic growth slowed to a 1.5% rate in Q2 2026, indicating a cooling economy [1]. As of the week of July 27, 2026, to August 1, 2026, U.S. borrowing costs reached a 19-year high despite the Federal Reserve’s decision to keep rates unchanged [7]. Following the Fed meeting, bond yields surged, particularly on the long end of the duration curve, due to market concerns that the Federal Reserve’s decision not to hike rates could worsen inflation [1]. Additionally, the personal savings rate dipped to 2.8% in Q1 2026, a level comparable to periods preceding the Great Recession [6]. Income distribution data from the Congressional Budget Office shows the lower-earning 80% took in 45.1% of income in 2022, while the top 20% took in 55.8%, reflecting a shift from 1979 ratios [6]. The Texas economy expanded in June 2026, with overall employment growth across the state, though unemployment rose slightly [4].

Future Outlook and Market Reaction

Looking ahead, Federal Reserve officials require several months of lower core inflation readings to confirm a downward trend before maintaining the current policy rate target range [8]. Federal Reserve Board Governor Christopher Waller stated that if another hot reading on core inflation occurs, the FOMC will need to consider tightening monetary policy in the near term [8]. However, markets are pricing in potential cuts if the unemployment rate rises as projected by some economists [1]. Market-based inflation expectations remain anchored near the Federal Reserve’s 2% target, with Treasury Inflation-Protected Securities indicating inflation expectations of 2.1% and 2.3% for the 2-year and 5-year horizons respectively [8]. In September 2026, the government will revise how the core personal consumption expenditures price index accounts for AI-related goods, which could lower inflation readings by up to 0.3 percentage points [7]. Warsh reaffirmed that the Federal Reserve maintains a strict 2% inflation target, rejecting the notion of alternative or soft targets [2]. The Federal Reserve continues to monitor incoming data in the coming weeks to determine if core inflation will decline toward the 2% target or remain elevated [8].

Sources

Monetary Policy Inflation Metrics