Kevin Warsh prefers a trimmed inflation gauge over the Fed's core PCE.
Bank of America warns this change could lead to different policy outcomes.
Trimmed measures might allow smaller price spikes (e.g., food, energy) to impact inflation readings.
In 2019 and 2020, a trimmed-median inflation gauge was higher than the core PCE, potentially encouraging a hawkish stance.
Kevin Warsh has suggested the Federal Reserve should focus on a trimmed average of inflation, arguing it provides a clearer picture of the underlying inflation rate by removing "one-off items" caused by geopolitical events or specific market changes. Bank of America economist Aditya Bhave cautions that while this approach might show softer inflation currently, it could backfire. By removing only the most extreme readings, smaller inflation spikes, like those in food and energy, might have a greater impact on the overall inflation reading. Historically, Bank of America’s data indicates that a trimmed-median inflation gauge was higher than the core PCE in 2019 and 2020. If this were to occur in the future, Warsh would need to maintain consistency with his preferred metrics, even if they suggest a more hawkish stance than the Fed’s current approach. This could impact Fed credibility if Warsh is perceived as "cherry-picking" data.
Q: What is core PCE?
Core PCE is the core price index for personal consumption expenditures, which excludes volatile food and energy prices.
Q: What is a trimmed average for inflation?
A trimmed average removes extreme price shocks when calculating overall inflation.
Warsh's preferred inflation measure could change how the Fed responds to economic changes.
Food and energy prices, though typically excluded, may become more influential under a trimmed average approach.
Keep an eye on the differences between trimmed inflation measures and core PCE to understand potential policy shifts.
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