Fed Debates Inflation Measures Amid Rising Price Pressures

The US Federal Reserve is facing a debate over which inflation measures to use in making interest-rate decisions. Fed Chairman Kevin Warsh has argued that policymakers should give more weight to the 'trimmed mean' index, which strips out extreme price changes.

Warsh made his case during the April confirmation hearing and has sparked a wider debate about how the Fed interprets volatile price shocks. The trimmed mean index adjusts for consumer spending patterns when relative prices move and provides a broader picture of behavior.

The Commerce Department's personal-consumption expenditures (PCE) price index is used by the Fed, but it shows inflation at 3.8% over the previous year. Core PCE inflation, which excludes food and energy, was 3.3%, while trimmed mean inflation stood at 2.3%. Warsh has questioned the standard core metric, describing it as a 'rough swag' that leaves one-off distortions untouched.

Warsh supports using trimmed mean inflation because he wants to know the underlying inflation rate, not just temporary price changes due to geopolitics or other factors. However, research by the Federal Reserve Bank of Dallas found that the trimmed mean index misread 2021 inflation dynamics, understating how strongly prices were building.