Fed Chair Warsh's Inflation Gauge Cools: Caution Advised

Fed Chair Warsh's Preferred Inflation Measure Cools

One of new Federal Reserve Chairman Kevin Warsh's favorite inflation gauges, the Dallas Fed's trimmed mean measure, cooled to 2.3% year-over-year in April, signaling easing price pressures. However, experts caution that the gauge may understate true inflation due to tariff distortions.

Limitations of the Measure

Dallas Fed economist Tyler Atkinson explained that while the trimmed mean normally filters out outliers, the widespread price increases from tariffs have reversed the typical skew, causing the gauge to underestimate inflation. A similar false signal occurred during the post-pandemic inflation surge.

Alternative Indicators

In contrast, the core PCE price index, the Fed's traditional gauge, rose 3.3% year-over-year in April, the fastest since 2023. Fed Governor Lisa Cook called it "clearly moving in the wrong direction." Analysts note that the trimmed mean has historically been less predictive of future inflation than core PCE.

Warsh told lawmakers he believes inflation "has improved somewhat in the last year." But some economists worry his preferred measure may have been chosen for ex post reasons, urging the Fed to conduct a thorough study and stick with a consistent methodology.