Underlying Inflation Hits Lowest Level in Years. The Key Price Measures Show Progress Toward the Fed’s 2% Target.

A broad set of inflation indicators suggests underlying price pressures are continuing to ease, offering the strongest evidence in years that inflation may be moving closer to the Federal Reserve's long-term target even as policymakers remain divided over the next move on interest rates.

Data released for June showed that several "trimmed mean" inflation gauges, which exclude unusually large price increases and declines to better capture underlying trends, fell to their lowest levels since the early years of the inflation surge that followed the pandemic. The figures come as Federal Reserve Chair Kevin Warsh has signaled he wants the central bank to broaden the range of metrics it uses when assessing inflation.

The Dallas Federal Reserve's trimmed mean measure showed one-month annualized inflation slowing to 1.4% in June, down sharply from 2.7% in May and marking its lowest reading since November 2020. On a 12-month basis, the measure eased to 2.2%, its lowest level since July 2021.

Economists say the data reinforce the view that underlying inflation is cooling, even though headline measures remain above the Fed's 2% objective. "The fact that underlying inflation is still slowing toward target, as indicated by a broad set of indicators, is now even more relevant given Chair Warsh's suggestion that he would analyze inflationary pressure by looking across a broad range of metrics," Citigroup economist Andrew Hollenhorst wrote in a note cited by CNBC.

Hollenhorst added that markets could begin reducing expectations for future interest rate hikes if inflation continues to soften, while rate cut expectations could return should the labor market weaken.

The latest figures were released alongside the Commerce Department's June Personal Consumption Expenditures Price Index, the Fed's preferred inflation gauge. The all-items PCE index declined 0.1% during the month, helped by lower fuel prices, while core PCE, which excludes food and energy, rose a modest 0.1%. Compared with a year earlier, headline PCE increased 3.7%, while core inflation stood at 3.3%.

Trimmed mean inflation measures are designed to filter out temporary price swings that can distort the broader picture. Rather than excluding only food and energy, as core inflation does, these indexes remove a percentage of the largest price increases and decreases across all categories before calculating the average.

The Dallas Fed's methodology excludes roughly 24% of the lowest price changes and 31% of the highest, while the Cleveland Federal Reserve publishes a separate 16% trimmed mean Consumer Price Index. That measure also declined in June, reaching 2.63%, its lowest reading since May 2021.

Despite the encouraging trend, Federal Reserve officials have cautioned against placing too much weight on any single indicator. Dallas Fed President Lorie Logan, whose regional bank oversees the trimmed mean PCE measure, has warned that recent changes in the composition of price movements may be causing the index to understate the true pace of inflation.

According to Logan, researchers at the Dallas Fed found that the measure may currently be excluding too many price increases because of the unusual distribution of price changes across the economy, making inflation appear lower than it actually is.

That skepticism was reflected in this week's Federal Open Market Committee meeting, where Logan joined Minneapolis Fed President Neel Kashkari and Cleveland Fed President Beth Hammack in dissenting from the decision to leave interest rates unchanged. Instead, the three policymakers favored raising the benchmark rate by a quarter percentage point.

In a statement released after the meeting, Logan argued that inflation remains above the Fed's goal despite recent improvement. "Even after accounting for productivity gains and temporary supply shocks, inflation appears to be trending toward the mid-2s, not all the way to 2 percent, and the risks are to the upside," she said.

Financial markets have also remained cautious. Treasury yields climbed following the Fed's decision as investors worried that leaving rates unchanged could allow inflationary pressures to persist longer than expected.

Warsh acknowledged that recent inflation data have shown progress but emphasized that the central bank is far from declaring victory after more than five years of above-target inflation.

"Not one of my FOMC colleagues is under any illusion," Warsh said. "We have begun a new chapter, and we understand that the five-plus years of inflation above target cannot be cured in nine weeks, or by a single month of modest price decreases."