By Nicole Goodkind

Kevin Warsh, who is on track to become the next chair of the Federal Reserve in mid-May, has a preferred way to measure inflation. It produces a result that is nearly a full percentage point lower than the Fed's currently preferred yardstick.

Fed officials typically track inflation via the personal consumption expenditures price index, published monthly. Officials pay closest attention to core PCE, which strips out food and energy, whose price swings are often unrelated to the underlying economy. Core PCE rose at a 3.2% annual pace in March, well above the Fed's 2% inflation target.

Warsh recently told the Senate Banking Committee that he prefers a different gauge: trimmed mean. "The data that's being used to judge inflation is quite imperfect," Warsh told the committee.

The Fed, he said, instead should use "trimmed averages" to evaluate the "underlying, generalized change in prices in the economy" and "not what's the one-time change in prices because of a change in geopolitics or a change in beef."

By that measure, inflation over in the 12 months ended March ran at about 2.4%, according to the Dallas Fed, close enough to target that some would call the Fed's inflation fight won. The gap between PCE and trimmed-mean inflation could spell the difference between a Fed with room to cut interest rates and one without. Cutting rates when inflation is elevated typically exacerbates the problem.

Core PCE always excludes food and energy, no matter how their prices change in any given month. The trimmed mean is calculated differently. After the price change in every spending category is measured each month, the most extreme gains and losses are excluded, or "trimmed" from the final calculation.

In March the Dallas Fed, which produces a popular version of the measure, excluded computer software and accessories, whose prices jumped at a 60.2% annualized rate, and tax preparation services, prices for which fell at a 27% annual pace. Both were included in core PCE.

Research from the Dallas Fed suggests trimmed mean is a better real-time indicator of inflation, as it sees through the noise to the underlying trend.

But it doesn't always work that way. Tariffs raise prices on imported goods, and when enough goods prices move in the same direction at once, as they tend to do under broad tariffs, they cluster at the top of the price-change distribution, right where trimmed mean cuts them off.

The Dallas Fed has flagged this problem. If tariff effects are a one-time bump in inflation, the trimmed mean will give a cleaner read on where inflation is headed. But if they are broadening into something more persistent, the trimmed mean will understate inflation, possibly by a lot.

The measure missed the early spread of inflation during the 2021 surge, running below core PCE while price pressures increased across the economy.

Other gauges tell different stories. The Cleveland Fed's median CPI, which picks the midpoint item rather than trimming the ends, is running near headline inflation. A New York Fed model put underlying inflation at 3.2% in March.

There are several plausible ways to measure price growth, and Warsh's preferred measure happens to yield the smallest change.

Even if Warsh wants to reorient the Fed around trimmed mean measures of inflation, he can't do it alone. The chair runs meetings and shapes the agenda, but policy is set by a committee. Jerome Powell, the outgoing Fed chair, said he attempted a communications overhaul last year and was largely talked out of it by colleagues and staff.

Warsh could face similar friction, and an additional problem: A measure that puts inflation closer to target just as a new chair takes over under political pressure to cut rates would invite accusations that the Fed has moved the goal posts.

The next trimmed mean reading from the Dallas Fed comes out May 28. If it is well below core PCE, Warsh may keep citing it. Whether other Fed policymakers and the markets warm to this alternative reading remains to be seen.

Write to Nicole Goodkind at nicole.goodkind@barrons.com

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May 11, 2026 01:00 ET (05:00 GMT)

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