MNI INTERVIEW: US Trimmed Mean Inflation Headed To 2.5% In '22

The Dallas Fed's trimmed mean PCE inflation rate, a favorite gauge of underlying inflation for Fed officials, is likely to rise to 2.5% next year as price pressures spread, Dallas Fed economist Jim Dolmas told MNI.

Supply shocks that initially showed up in a small subset of categories are finding their way to a broader set of goods, while rent and owners' equivalent rent inflation will keep accelerating based on house price gains, as firms continue to pass on some or all of their rising wage costs to consumers, boosting core PCE inflation, Dolmas said.

"In July we had a forecast of 2.3% to 2.4% for next year, and the data since then suggest maybe it's happening a bit quicker and will rise a bit higher. We'll probably nudge that up to 2.5% next year," he said. "There's still some pick-up to come."

The 12-month trimmed mean rate has remained in a narrow range of 1.7% to 2.0% during the pandemic through August even as headline PCE hit multidecade highs. But in September the trimmed mean rose to 2.3%, the highest since 2008.

CENTER SHIFTS RIGHT

The six-month annual rate shows even more momentum, quickening to 3.1% in September from 2.6% in the summer and 1.8% in April. The one-month annualized trimmed mean rate for September was a whopping 5.1%, nearly double that of August.

"It's a real rightward shift in the distribution of price changes," Dolmas said. More than 60% of categories recorded 5% annualized inflation or higher in September, and three-quarters of the basket rose at an annualized rate of 2.9% or more.

The two housing price measures -- rent and owners' equivalent rent -- gained over 5% on an annualized basis in September, while dining out prices jumped 8%. The three core services categories comprise the most stable and smooth parts of the price basket and make up 20% of the PCE inflation rate.

'WORRISOME' FOR EXPECTATIONS

Inflation trends for rent and OER tend to be slower moving and persistent, which alone adds momentum to higher inflation next year even if things return to normal, Dolmas said. Meanwhile, the shift in dining out prices is likely "more about cost of labor than the cost of food, and that's probably true to a lesser extent for lots of other categories," Dolmas said. Leisure and hospitality sector workers have seen year-on-year wage increases of over 10%.

October CPI, released about a month before PCE inflation, showed a similar trend, portending another step higher for the Fed's official inflation measure and stoking worries about consumer inflation expectations, Dolmas said.

"It's always worrisome to have a run of high inflation, especially on things and goods that people purchase frequently," he added. "The great risk is the de-anchoring of inflation expectations, and episodes of high inflation makes that more likely. It's something to keep a focus on."