What Fed Chair Warsh's favored inflation measure tells us about the economy

The central bankers over at the Federal Reserve, famously, have a favorite measure of inflation: the personal consumption expenditures price index. Last week, at it’s latest reading, the PCE sat at 3.8% and 3.3% for “core” inflation — both well above the Fed’s 2% target.

New Fed Chair Kevin Warsh might have his eye on a different number. At his confirmation hearing in April, Warsh said, “the measures I prefer are looking at things called trimmed averages.”

Trimmed averages, also called trimmed means, is an inflation measure that tries to exclude price jumps, said Tiffany Wilding, an economist and managing director at PIMCO.

“When you and I are paying for our streaming, you know, our Disney Plus … it’s not like we’re getting incremental price increases every month,” she said. “They have these bigger adjustments, maybe once a year or once every several years.”

Core PCE takes out food and energy, because both categories are so volatile they muddy the inflation waters. Meanwhile, the trimmed mean is all about kicking out other temporary outliers.

“It’s sort of trying to … understand what are inflationary pressures, maybe that are more ingrained … that would tell us more about the underlying state of the economy,” Wilding said.

The Federal Reserve Bank of Dallas puts out probably the most well-known trimmed mean reading. In April, that came in at 2.3%, which is a much more comfortable number for the Fed.

Of course, just what counts as an outlier can be in the eye of the beholder.

“The way the Dallas Fed trims its PCE measure is it essentially trims 24% off of the top and 31% off of the bottom. That’s more than half the measure,” said Vikas Patel, program manager at Employ America. “And, it’s asymmetric, which means you’re throwing out more of the inflationary measures rather than the ones that are bringing inflation down. How you trim matters substantially.”

Plus, that this measure falls below core PCE is unusual. The trimmed mean historically falls above core inflation, Wilding said.

“So just because the trimmed mean is under core today doesn’t mean in six months’ time or even in a year’s time that it’ll still be there,” she said.

Think about what we’ve heard from now-former Fed Chair Jay Powell for years: More. Data. Give it some time.