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Trimmed-mean inflation measures, which filter out extreme price changes, are flawed because they ignore the "canaries in the coal mine." This approach would have missed the initial 2021 inflation surge, which began in a narrow set of goods and later spread, creating a dangerously dovish and incorrect view.
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The new Fed chairman prefers a "trimmed mean" inflation gauge which currently reads lower than traditional measures. By excluding items like energy, this change provides political cover to cut interest rates before an election, even if underlying inflation remains high, effectively moving the goalposts to suit a policy objective.
After accounting for measurement quirks in both CPI and PCE, the podcast's economists converge on an estimate for "true" underlying inflation around 2.7-2.8%. This consensus view suggests that while official measures are noisy, the underlying trend is still meaningfully above the Fed's 2% target.
Kevin Warsh advocates for the Dallas Trimmed Mean inflation metric, which excludes extreme price moves. However, this gauge can be misleading. A single significant shock, like oil prices, initially gets excluded but its effects gradually bleed into many other items, causing the metric to lag behind true underlying inflation.
The Fed uses slow, imprecise methods like household surveys to measure key inflation components like rent. This creates a significant lag, causing them to be late in both recognizing rising inflation (as in 2021) and seeing its decline, resulting in harmful policy errors and misallocation of trillions.
The CPI averages costs across 80,000 items, many of which are non-essentials or luxury goods. This method masks the true, higher inflation rate on basic necessities. For example, while the CPI showed a 72% cost increase over two decades, the actual cost of essentials like housing, food, and healthcare rose by a much larger 97%.
A measure of "market-based core PCE services ex-housing" inflation is accelerating. This niche metric, which strips out imputed prices and volatile sectors, suggests that core economic activity is generating persistent inflation, challenging narratives focused solely on energy shocks or trade wars.
Focusing on falling oil prices as a sign of easing inflation is simplistic. Leading indicators like the sectoral breakdown of payrolls and a core PPI that has jumped from a 3% to a 5% handle in six months suggest a stickier, more concerning inflation outlook for the Federal Reserve.
The Trimmed Mean CPI, which removes price extremes, is criticized for being unhelpful in the current environment. By design, it cuts out the very supply shocks (e.g., energy, food prices) that are the primary drivers of inflation, leaving a distorted picture dominated by housing.
The surprising 0% change in June's core CPI was driven by noisy, one-off drops in volatile categories like hotel prices (-3%), apparel, and medical care. This cluster of declines created an unusually low reading that doesn't reflect the underlying inflation trend.
The new Fed Chair's suggestion to use measures like the trimmed-mean CPI isn't new. These same metrics were used by Fed governors in 2021 to justify delaying rate hikes. They failed to capture the breadth of rising inflation then, which suggests caution should be used before elevating them as primary policy guides now.