By Ann Saphir
May 28 (Reuters) – One of new Federal Reserve Chairman Kevin Warsh’s favorite inflation measures came in cool again on Thursday, offering evidence for his belief that inflation is improving and against the view of a growing number of other policymakers that interest rate hikes may be needed to tamp down rising price pressures.
Year-over-year inflation by the Dallas Fed’s trimmed mean measure – the best-known of what Warsh referred to in his confirmation hearing as “trimmed averages” for inflation – was 2.3% in April, the Fed bank reported on Wednesday, down from 2.4% in March.
Trouble is, the publishers say that it is understating the underlying inflation trend right now.
“You would want to be cautious on getting too much optimism from the level of the trimmed mean,” Dallas Fed economist Tyler Atkinson explained in an interview on Wednesday ahead of the latest data release.
In normal times, he said, the gauge works well to filter out the noise from outlying components, which in April included surging prices for gasoline, airfare and jewelry, and a drop in the prices for poultry, household linens and haircuts. It trims off the fastest-rising prices and fastest-falling prices, leaving a more representative middle set of price changes that typically serves as a good indicator of where inflation is heading.
Items with falling or very slow-rising prices typically outnumber items with steeply rising prices, so Dallas Fed researchers compensate by lopping off more high-inflation items than low-inflation ones.
But lately – because tariffs imposed by President Donald Trump over the last year have pushed up prices for a large chunk of goods – the usual “skew” is reversed. That means that trimming the top 31% and the bottom 24% of items in the index, as the gauge’s methodology calls for, ends up pushing the gauge downward, understating true price pressures, Atkinson explained.
This has happened before, notably in the post-pandemic inflation surge when the Dallas Fed’s trimmed mean measure of inflation gave a false signal suggesting inflation would be cooler than it turned out to be.
By contrast, the measure Fed policymakers have been using for some time to gauge underlying price pressures – the core personal consumption expenditures price index excluding volatile energy and food prices – rose 3.3% in the 12 months through April, the Commerce Department’s Bureau of Economic Analysis said on Thursday.
That is the fastest since 2023 and is, as Fed Governor Lisa Cook said on Wednesday, “clearly moving in the wrong direction.”
At his confirmation hearing last month, though, Warsh told lawmakers he prefers to take his signal from “trimmed averages” and, as he told Democratic Senator Catherine Cortez Masto, he believes inflation “has improved somewhat in the last year.”
Analysts are skeptical.
“We think it is difficult to argue that the disinflation signaled by the trimmed mean is real,” wrote Standard Chartered Bank analysts Steve Englander and Dan Pan, noting not just the Dallas Fed measure’s statistical properties but also that it historically has not been as good at predicting future inflation as core PCE.
The Dallas Fed has no plans to change its methodology, Atkinson said. If tariff-induced price pressures recede as expected, the problem should cure itself in coming months. Until then, other guides to underlying inflation may merit more attention.
In a post on X on Thursday, Harvard economist Jason Furman noted that the trimmed mean reading is not the only muted measurement of inflation lately. Cleveland Fed’s separate measure of median PCE inflation has also declined in recent months, though at 2.8% is a bit higher than the Dallas Fed measure.
Of Warsh’s preferred measure, he said, there is nothing to say it is unreasonable.
“The worry is that it was picked for ex post reasons,” he said, adding he “would rather the Fed did more of a study of the best signal extraction, proposed something, and stuck with it.”
(Reporting by Ann Saphir in Berkeley, California; Editing by Dan Burns, Andrea Ricci and Matthew Lewis)
Comments