US Federal Reserve: Is The Fed Getting Inflation Wrong? Kevin Warsh Thinks So

Fresh data on US inflation is sending mixed signals to the Federal Reserve, with one key measure pointing well above the 2% goal and another suggesting price pressures are close to target. The split has sharpened debate over which gauges should guide interest-rate decisions, just as Fed Chairman Kevin Warsh urges a rethink of how policymakers interpret volatile price shocks.

Warsh used the April confirmation hearing to argue that the central bank should give more weight to measures like the “trimmed mean” index, which strips out the most extreme price changes. That stance has shifted what was once a technical argument among economists into a live policy issue for markets that are watching the path of US interest rates.

Inflation Measures The Fed Tracks And Why They Matter

The US consumer-price index, released by the Labor Department, usually attracts the most attention because it arrives early each month and feeds directly into Social Security adjustments, inflation-linked bonds and many private contracts. Yet Fed officials rely more on the Commerce Department’s personal-consumption expenditures price index, or PCE, which defines the 2% inflation target and covers a wider set of household spending.

PCE adjusts for how consumers switch between goods when relative prices move, giving policymakers a broader picture of behaviour. In April, overall PCE inflation stood at 3.8% over the previous year. The Fed often looks beyond that headline figure to focus on “core” prices, which exclude food and energy because those categories can swing sharply from month to month.

Core inflation, trimmed mean inflation and Warsh’s critique

The Commerce Department reported that core PCE inflation was 3.3% over the past year, suggesting price growth is still some distance from the Fed’s target. Yet a trimmed mean inflation measure, which removes the largest price increases and decreases, showed a much lower 2.3%. Warsh has questioned the standard core metric, describing it as a “rough swag” and saying it leaves too many one-off distortions untouched.

Fed officials already examine several gauges that try to filter out unusually large price changes, such as steep cuts in wireless phone bills or temporary tariff spikes. What sets trimmed mean inflation apart is that it applies a fixed rule each month, cutting away the most extreme moves to reveal an underlying trend. Warsh told lawmakers, “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,” signalling support for that approach.

How trimmed mean inflation is built, and the 2021 inflation surge

Warsh did not specify which trimmed mean inflation series he prefers, but the most widely cited version is produced by the Federal Reserve Bank of Dallas. That index removes price categories that together account for more than half of consumer spending each month, discarding both sharp increases and steep falls. Research from the Dallas Fed has found that this method has often predicted future inflation better than the standard core measure.

However, the performance of trimmed mean inflation in 2021 has clouded its reputation. During the pandemic rebound, inflation climbed far faster than most policymakers and forecasters had expected, yet the trimmed mean index moved up much more gradually. Some officials used that slower increase as evidence that the burst in prices would fade, which later proved too optimistic as inflation stayed elevated.

Why trimmed mean inflation misread 2021 inflation dynamics

The design of the Dallas Fed’s trimmed mean inflation index helps explain that misstep. Between 1977 and 2009, price declines were typically steeper than price rises. If the index had cut the same share of increases and decreases, the average inflation trend would have been skewed higher. To avoid that bias, the Dallas Fed chose to drop the largest 31% of increases but only the biggest 24% of decreases each month.

That adjustment worked under earlier conditions but backfired when the pandemic hit and price rises became steeper than price falls. In those circumstances, removing a larger slice of increases meant the index systematically discarded more of the upward pressure. As a result, the trimmed mean measure understated how strongly inflation was building through 2021, contributing to the belief that the shift would prove temporary.

Current US inflation readings and the influence of tariffs

Recent figures echo that pattern, with trimmed mean inflation again running below broader gauges. Dallas Fed researchers calculate that in April the trimmed mean measure was 0.7 percentage points lower than core PCE. The main reason was a smaller weight on goods excluding food and energy, which are the items most directly affected by tariffs. Tariff increases have pushed up costs across a range of imported products.

At the same time, spending linked to artificial intelligence has lifted prices in software and computing. Those influences raise the question of whether they are one-off shocks that should be stripped out, or signs of more persistent demand. To help clarify the picture, analysts at Employ America, a left-leaning think tank, have constructed alternative trimmed measures using the same PCE data.

Alternative inflation gauges and what they signal for the Fed

Employ America’s symmetric trimmed mean inflation index cuts the same share of extreme increases and decreases from the PCE distribution. This approach removes much of the gap with core PCE. On that basis, the trimmed mean rate stood at 3% in April. The think tank also produces another series that leaves out housing and other categories where prices lag market conditions or are not directly measured, such as some medical costs.

That second gauge registered 2.8% in April and has risen on a year-over-year basis for 13 straight months. For Riccardo Trezzi, a former Fed economist who now runs an inflation-research firm, the broader pattern is more telling than any single index. Trezzi argues that the full distribution of prices has not matched the Fed’s 2% goal since 2021 and has drifted higher again in recent months.

Inflation shocks, “looking through” and the policy stakes for the Fed

Warsh’s stance on inflation measures matters because it reflects a wider debate about how the Fed should treat repeated shocks from tariffs, geopolitical tensions and heavy AI-related investment. Central bankers refer to this as “looking through” a price move, meaning they decide not to react with interest-rate changes if they expect the pressure to fade on its own. How often that judgment is used could shape policy for years.

“The question is whether 'looking through' becomes a principled framework or simply a way to down-weight inconvenient inflation prints when needed,” said Trezzi. If the latest price spikes are genuinely temporary, trimmed mean inflation may offer the Fed a cleaner read on underlying trends and reduce the case for further tightening. If they reflect broader and lasting demand, alternative gauges could give false comfort and again leave the Fed behind the curve.