Inflation is the worst in three years. Kevin Warsh says that’s not the full story
Inflation is the worst in three – Last month marked the third-highest inflation rate in recent years, according to updated figures released this week. However, newly appointed Federal Reserve Chair Kevin Warsh is pushing for a shift in focus, arguing that traditional metrics may not fully reflect the economy’s true state. During his April confirmation hearing, Warsh emphasized his preference for alternative inflation indicators, such as trimmed-mean averages, which he believes offer a clearer picture of long-term price trends.
Measuring Inflation Differently
Trimmed-mean averages, calculated by regional Fed banks, adjust for extreme price fluctuations by excluding outliers. This approach aims to smooth volatility and provide a more consistent gauge of inflation’s direction. Warsh, who will lead the central bank’s first policy meeting next week, suggests this method could help avoid overreacting to temporary price shocks, such as those driven by geopolitical tensions or sudden shifts in commodity markets.
“The measures I prefer are looking at things that are called trimmed averages,” said Warsh during his confirmation hearing. “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.”
While the Dallas Fed’s trimmed-mean estimate for April showed 2.3% annual inflation, and the Cleveland Fed’s similar metric reached 2.9% in May, these figures contrast sharply with the May CPI, which rose to 4.2%. The Producer Price Index (PPI), released on Thursday, hit a 6.5% annual increase, signaling a potential acceleration in consumer costs. The PPI, which tracks inflation at the factory level, often precedes broader price trends.
Debating the Accuracy of Trimmed Means
Some economists remain skeptical about the reliability of trimmed-mean averages. “Fed Chair Kevin Warsh has declared himself a fan of trimmed mean estimates,” noted Richard de Chazal, a macro analyst at William Blair. “But the reality is that inflation is now pointing firmly higher.”
Although the Fed already monitors core inflation—excluding food and energy prices—it has also adopted the Personal Consumption Expenditures (PCE) index, which is considered more comprehensive than the CPI. Core PCE has climbed steadily since February, reaching 3.8% in April. The upcoming May PCE data will provide further insight into this trend.
“Trimmed mean is generally a better predictor of where inflation is headed,” said the Brookings Institution in an April analysis. “Trimmed Mean PCE inflation has many advantages over core PCE, including a tighter relationship with labor market slack as well as smaller subsequent revisions,” according to Dallas Fed research.
Yet, recent findings suggest trimmed-mean averages may not be as effective now. Dallas Fed President Lorie Logan, a Fed voter in 2026, warned that the current readings are skewed. “A change in the mix of price increases and decreases is currently biasing the trimmed-mean lower than it should be,” she explained at an event in El Paso, Texas.
Experts like Brian Bethune, an economics professor at Boston College, argue that the trimmed-mean figures are understating inflationary pressures. “The Dallas Fed’s trimmed-mean measure is biased downward these days because it’s not fully capturing the abrupt jump from price shocks,” Bethune stated. He doubts the rate-setting committee will adopt this metric without further evidence.
The Fed is widely anticipated to maintain its benchmark rate unchanged next week, but it may hint at future hikes due to concerns about rising inflation. If Warsh successfully advocates for trimmed-mean averages, the central bank could delay rate increases, potentially slowing the pace of price growth. However, this strategy may depend on how the data evolves and whether the Fed’s policymakers agree with his interpretation.
CNN has sought comments from the Federal Reserve to clarify its stance on these alternative inflation measures. As the central bank navigates its new leadership, the debate over which metrics to prioritize will shape its monetary policy decisions in the coming months.
