WASHINGTON—A growing debate inside the Federal Reserve over how inflation should be measured could have significant implications for future interest-rate decisions, with Fed Chairman Kevin Warsh signaling support for alternative inflation gauges that currently paint a much less alarming picture of price pressures than traditional measures, according to a new analysis.
While the widely watched measure of core consumer inflation stood at 3.3% over the previous 12 months, a lesser-known gauge known as “trimmed mean” inflation was running at just 2.3%, much closer to the Federal Reserve’s 2% inflation target, according to the Wall Street Journal.
The publication said in its analysis that the difference has taken on greater significance after Warsh highlighted the importance of looking beyond headline inflation figures during his April confirmation hearing, arguing policymakers should focus on underlying inflation trends rather than temporary price shocks caused by tariffs, geopolitical events or fluctuations in individual products.
‘Not About Politics or Beef’
“What I’m most interested in is what’s the underlying inflation rate, not what’s the one-time change in prices because of a change in geopolitics or a change in beef,” Warsh said, according to The Journal.
The debate centers on whether alternative inflation measures do a better job of filtering out temporary distortions or whether they risk understating persistent inflationary pressures that could require a policy response, according to the analysis.
Fed’s Preferred Inflation Measure
While the Consumer Price Index often receives the most public attention, the Journal noted Federal Reserve officials generally place greater emphasis on the Commerce Department’s Personal Consumption Expenditures Price Index, or PCE, when setting monetary policy. The Fed uses the PCE index as the basis for its 2% inflation target because it captures a broader range of consumer spending and adjusts for changes in purchasing behavior.
Traditionally, policymakers have focused on “core” inflation measures that exclude food and energy prices, which can fluctuate sharply from month to month, the Journal reported. However, Warsh reportedly described core inflation as an imperfect approximation because it can still be influenced by temporary price swings in other categories.
The Journal explained that the trimmed mean approach seeks to address that issue by systematically excluding the most extreme price increases and decreases each month, theoretically providing a clearer view of longer-term inflation trends. The most widely followed version is produced by the Federal Reserve Bank of Dallas.
Lessons From The Pandemic
The Journal noted that trimmed mean inflation has historically performed well as a predictor of future inflation, but its record suffered during the inflation surge that followed the COVID-19 pandemic.
During 2021, many economists and policymakers initially viewed rising inflation as temporary, the report reminded. Trimmed mean measures appeared to support that view because they showed inflation increasing more slowly than broader indexes. Later analysis found that the methodology used by the Dallas Fed inadvertently filtered out a larger share of rapidly rising prices, causing the measure to understate inflationary pressures during the period, the Journal said.
The Journal added that that experience has led some economists to question whether the measure could again be understating inflation if current tariff-related price increases and artificial intelligence-driven investment spending prove more persistent than expected.
Concerns Over New Inflation Pressures
According to The Journal, Dallas Fed researchers recently found that trimmed mean inflation was 0.7 percentage points lower than core PCE inflation in April, largely because it assigned less weight to goods categories most directly affected by tariffs.
Other economists have developed alternative trimmed inflation measures that produce higher readings. One measure developed by Employ America, a research organization, showed inflation running at 3% in April, while another measure that excludes housing and certain lagging categories registered 2.8% and has increased year-over-year for 13 consecutive months.
Some analysts argue that broader price distributions continue to indicate inflation remains above levels consistent with the Fed’s long-term target, the Journal reported.
