Warsh’s favourite inflation gauge cools, but economists warn against celebrating too soon – Firstpost

The inflation gauge preferred by US Federal Reserve Chair Kevin Warsh showed further signs of cooling in April, offering support to his argument that price pressures are easing. However, economists and policymakers are warning that the measure may be masking underlying inflation risks, particularly those linked to tariffs imposed by US President Donald Trump.

The Dallas Federal Reserve’s trimmed mean inflation measure slowed to 2.3 per cent year-on-year in April from 2.4 per cent in March. The indicator, which removes extreme price movements from both ends of the spectrum to provide a clearer picture of underlying inflation trends, has long been favoured by Warsh over traditional core inflation measures.

But even the architects of the index are urging caution.

“You would want to be cautious on getting too much optimism from the level of the trimmed mean,” Dallas Fed economist Tyler Atkinson said, noting that the measure may currently be understating inflationary pressures because tariff-related price increases are affecting a much broader range of goods than usual.

The distortion stems from the methodology of the index. Normally, the measure trims away the most extreme price increases and decreases to capture the underlying trend. However, widespread tariff-driven price rises have altered the distribution of prices, causing the measure to exclude a significant number of inflationary items and thereby suppress the overall reading.

In contrast, the core Personal Consumption Expenditures (PCE) price index, the Fed’s traditional benchmark that excludes food and energy, rose 3.3 per cent in the 12 months through April, marking its fastest pace since 2023. Fed Governor Lisa Cook recently described the trend as “clearly moving in the wrong direction.”

Warsh, who was sworn in as Fed chair last week, has repeatedly defended the use of “trimmed averages” as a better guide to underlying inflation. During his confirmation hearing, he told lawmakers that inflation had “improved somewhat” over the past year. Not everyone agrees.

Analysts at Standard Chartered argued that the disinflation signalled by the trimmed mean measure is difficult to reconcile with broader price data and noted that it has historically been less reliable than core PCE in forecasting future inflation.

Harvard economist Jason Furman also raised concerns, suggesting that policymakers should avoid relying too heavily on a single indicator. While he said Warsh’s preferred measure is not unreasonable, he questioned whether it was being emphasised because it currently supports a more benign inflation narrative.

For now, the debate highlights a growing divide within the Fed and among economists over whether inflation is genuinely cooling or whether tariff-related pressures are merely being obscured by statistical quirks. As markets look for clues on the future path of US interest rates, the answer could prove crucial.