Fed Chair Warsh's Preferred Inflation Measure Cools: Caution Advised

Fed Chair Warsh's Preferred Inflation Measure Cools

The Dallas Fed's trimmed mean inflation, one of new Fed Chair Kevin Warsh's favorite gauges, eased to 2.3% year-over-year in April, supporting his view that inflation is improving. However, experts warn that the measure may understate true price pressures under current conditions.

Limitations of the Trimmed Mean

Dallas Fed economist Tyler Atkinson explained that tariffs have pushed up prices for a broad range of goods, reversing the usual skew in the data. This causes the trimmed mean to underestimate inflation, as happened after the financial crisis and during the pandemic.

Core PCE Inflation Rises

In contrast, the core PCE price index, traditionally used by the Fed, 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 Skeptical

Standard Chartered analysts argued that the disinflation signaled by the trimmed mean is not real, noting core PCE has historically been a better predictor. The Dallas Fed has no plans to change its methodology, but Atkinson advised policymakers to look at multiple measures rather than relying on a single gauge.