By Andrew Miller
Inflation just posted its best numbers in five years. Your costs did not go down.
Here’s why both are true.
Over in Texas, the Dallas Fed reported that its trimmed mean measure of inflation fell to 2.2% over the twelve months through June. With the lowest reading since July 2021, this number inches closer to the Federal Reserve’s 2% target.
A trimmed mean measures something narrower than the headline inflation figure. It removes the smallest 24% of price changes and the largest 31% in the Fed’s preferred price index, then averages what’s left.
Trimming the extremes keeps one volatile category from distorting the total in a given month, and the uneven split reflects that prices tend to rise more often than fall.
The untrimmed numbers look different.
Headline CPI was up 3.5% over the twelve months through June. That’s an improvement over the prior month’s reading, largely due to a sharp drop in fuel costs. Even so, energy was still up 15.7% compared to last year. Food and shelter rose as well.
The Atlanta Fed sorts prices a different way than Dallas, into sticky and flexible categories.
Sticky prices are the ones set by contract or adjusted infrequently, like rent, insurance, and medical care. They tend to reflect what businesses expect over the coming year rather than what happened last month.
On the other hand, flexible prices respond to commodity markets almost immediately. These include fuel, freight, and food inputs.
Sticky prices are up 2.8% over the past twelve months. Flexible prices are up 5.1%, nearly double that, even after a sharp June decline driven by falling fuel costs.
Both sets of numbers are accurate. They describe different parts of the same economy. Prices in the middle of the distribution have calmed considerably. Prices at the edges have not.
For a business owner, the edges are not a statistical category.
Fuel, freight, and food inputs are the operating budget of a restaurant, a trucking outfit, or a contractor bidding jobs weeks out. They decide whether a quote given in the spring still holds in August, and they are the first thing a trimmed measure removes.
That distinction matters beyond the headlines. Variable-rate business loans and credit lines are typically tied to the prime rate, which moves with the Fed’s policy rate.
The trimmed figures are among the gauges informing that decision. If they hold near the Fed’s target, the case for lower rates strengthens and financing gets cheaper.
However, cheaper financing does not make fuel cheaper. The inflation reading and the cost structure are two different problems.
Right now only one of them is improving.
P.S. Costs tend to move before the data does. If yours are moving, Signet can walk you through your funding options. Let’s talk.