Navigating Inflation Crosscurrents: Energy and Healthcare in the Trimmed Mean Era

The Dallas Fed's Trimmed Mean PCE inflation rate, a critical gauge of underlying price trends, now stands at 2.5% for the 12 months ending in May 2025—a modest decline from its late-2024 peak of 2.8%. This metric, which filters out extreme price fluctuations, suggests a moderation in core inflation, even as geopolitical tensions and trade policies continue to roil specific sectors. For investors seeking opportunities in sector rotation, the interplay between energy and healthcare offers a compelling case study. Let us dissect how inflation dynamics, as captured by the Trimmed Mean, are reshaping these sectors and what this means for portfolios.

The Energy Sector: Volatility Amid Declining Prices

Energy prices have fallen nearly 6% over the past year, driven by OPEC's supply adjustments and geopolitical jitters—most notably the Iran-Israel conflict. While spot prices spiked temporarily after Israel's recent strike on Iran, futures markets remain skeptical of prolonged supply disruptions. This dynamic aligns with the Trimmed Mean PCE's design, which excludes extreme price swings, leaving energy's contribution to core inflation muted.

However, the sector faces headwinds. The Dallas Fed's data highlights that energy's decline has been gradual, not a sharp deflationary collapse. Meanwhile, geopolitical risks—such as ongoing tensions in the Middle East—create uncertainty. Investors must weigh whether current valuations reflect these risks or if energy stocks have overshot to the downside.

The chart above reveals that energy has underperformed healthcare since mid-2024, with XLE down 15% versus XLV's 8% gain. This divergence underscores investor skepticism about energy's recovery amid persistent volatility.

The Healthcare Sector: Stability in a Cooling Inflationary Environment

Healthcare presents a contrasting narrative. Core non-housing services inflation, which includes healthcare, has eased to 3.0%—near pre-pandemic levels—a trend reflected in stable wage growth and moderated input costs. The sector's inelastic demand and reliance on government programs (e.g., Medicare/Medicaid) insulate it from broader inflation swings.

Tariffs and labor cost pressures, which have impacted other sectors like durable goods, have less bearing on healthcare. Instead, its challenges are structural: aging populations and rising demand for chronic disease management. Companies with strong pipelines in generics, diagnostics, or telehealth—such as Pfizer (PFE) or UnitedHealth Group (UNH)—are well-positioned to capitalize on these trends.

The correlation here is inverse: as inflation has cooled, healthcare's P/E has risen, reflecting its defensive appeal. This bodes well for investors seeking stability.

Policy Implications and Investment Strategy

The Federal Reserve, monitoring the Trimmed Mean PCE, remains attuned to lingering risks. While core inflation is under control, tariff-driven goods inflation and labor market tightness could rekindle pressures. For sector rotation, this favors healthcare's resilience over energy's uncertainty.

Recommendation:
- Overweight healthcare: Target firms with pricing power and exposure to aging demographics, such as pharmaceuticals (PFE, JNJ) and managed care (UNH).
- Underweight energy: Avoid pure-play exploration companies; instead, favor integrated majors (XOM, CVX) with diversified cash flows and dividend yields.
- Monitor inflation expectations: A sustained rise in short-term inflation expectations (currently at 5.1%) could shift dynamics, but the Trimmed Mean's stability suggests this is a temporary blip.

Conclusion

The Dallas Fed's Trimmed Mean PCE is not merely a statistical tool—it is a compass for investors navigating inflation's crosscurrents. In energy, volatility and geopolitical risks demand caution; in healthcare, structural growth and inflation resilience offer a safer harbor. As core inflation trends downward, portfolios should tilt toward the latter.

This comparison underscores healthcare's consistency versus energy's swings. For now, the Trimmed Mean era favors the scalpel of healthcare over the sledgehammer of energy.

Stay steady, but stay informed.

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This analysis is based on Dallas Fed PCE data through May 2025 and assumes no material changes in geopolitical or trade policies.