Monthly Inflation Trends
The Dallas Fed’s trimmed mean PCE for July shows an annualised rate of 1.9%, down from 3.4% the previous month. This trimmed mean PCE is a measure used to analyse US inflation.
Looking at different timeframes, the 6-month annualised rate has decreased slightly to 2.6% from 2.8%. The 12-month annualised rate remained stable at 2.7%.
The 1-month annualised rate tends to fluctuate more, making it less reliable for spotting lasting trends. The 6-month and 12-month rates provide a clearer indication of inflation trends over time.
We see the new Dallas Fed Trimmed Mean PCE shows a sharp one-month drop to 1.9%, which is causing some short-term excitement. However, the more stable six and twelve-month measures are still stubbornly high at 2.6% and 2.7% respectively. This tells us the underlying inflation trend hasn’t been broken and remains well above the Fed’s target.
In response, the CME FedWatch Tool has seen probabilities for a September rate hike drop from over 50% just last week to around 25% this morning. We are seeing this priced into SOFR futures, which have rallied on the news. Still, the market is not pricing in any rate cuts until well into 2026, reflecting the stickiness in the core data.
Market Sentiments
The CBOE Volatility Index (VIX) has dipped below 15 on this news, but we see implied volatility for options expiring after the next Fed meeting in September remaining elevated. This suggests a good environment for selling near-term premium while being cautious about longer-term direction. Strategies like iron condors could benefit if the market stays range-bound as it digests this conflicting data.
We have to remember the lessons from the persistent inflation of 2023, when several “cooler” inflation prints proved to be head fakes before prices re-accelerated. The Fed is likely to be wary of that period, needing to see a sustained multi-month trend before signaling any pivot. This historical context makes us cautious about chasing a big directional move just yet.
All eyes will now turn to the August jobs report, scheduled for release next Friday, September 5th. A soft non-farm payrolls number, perhaps below the 175,000 consensus estimate, would reinforce this disinflationary signal. Conversely, a strong report would likely erase today’s dovish sentiment and put a rate hike firmly back on the table.
