MNI INTERVIEW: One-Off Factors Slow PCE Inflation:Fed's Dolmas

By Jean Yung

     WASHINGTON (MNI) - A sharp deceleration in the Federal Reserve's preferred

inflation gauge may have been driven by one-off factors, Dallas Fed economist

Jim Dolmas said in an interview, noting that alternative trend inflation

measures point to the rate of increases in prices holding steady at close to the

2% target.

     Personal Consumption Expenditures inflation for items excluding food and

energy slid to 1.6% in March from 2.0% in December. But the Dallas Fed trimmed

mean PCE inflation has stayed in a tight 1.9% to 2.0% range this year, while the

Cleveland Fed median CPI actually accelerated to 2.8% year-over-year in March

from 2.7% at the start of the year. The Atlanta Fed sticky-price CPI held at

2.4% over the same period.

     "Inflation moving about sideways is my forecast," Dolmas told MNI. "The

trimmed mean has been around 1.9% or 2.0% for almost a year. A year from now, I

see it still at 2%."

     Fed Chair Jay Powell drew attention to the steady performance of trimmed

mean PCE while describing the next rates move as data dependent last week. If

policymakers are persuaded to discount temporary price shocks, they may be less

eager to take out "insurance" rate cuts to bolster inflation in an otherwise

healthy economy.

     --HISTORICALLY SUPERIOR

     The Commerce Department's core inflation measure has underestimated actual

inflation over the past 15 years, Dolmas and colleague Evan Koenig found in a

working paper published Monday.

     Since 2005, headline PCE inflation has averaged 1.8%, compared to around

1.6% for core PCE. Dallas's trimmed mean measure, which reflects the central

tendency of price gains among goods and services, proved to be more accurate,

also averaging 1.8% since 2005.

     What's more, the Phillips Curve relationship between unemployment and the

trimmed mean rate appears to be stable over the past four decades, with a larger

and highly significant coefficient of -0.2 when compared to a regression using

the official core inflation rate, they found.

     "In stripping out noise from inflation measures, the signal comes through

on the relationship between inflation and slack in the economy," Dolmas said.

     --NOISE FACTORS

     Large declines in prescription drug and physician services prices (at a -2%

annualized rate), financial services (-8%) and airfares (-12%) in the first

quarter "stuck out like sore thumbs" and put the brakes on PCE inflation, Dolmas

said. The 1.9% decline in apparel prices that dragged down the March inflation

numbers were of less consequence on a quarterly basis.

     But on the other side, heavily weighted categories of rent and dining out

prices picked up in the first quarter. These core services are good gauges for

the underlying inflation trend.

     The pick-up in rent inflation to 3.7% in March from 3.4% at the start of

the year was "a bit of a surprise," Dolmas said, but may not persist.

     Overall, "the outliers aren't telling you about where the central tendency

of inflation is. On an eyeball test, it's hard to say where the central tendency

moved. In some sense it didn't move much at all," he said.

--MNI Washington Bureau; +1 202-371-2121; email: jean.yung@marketnews.com

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