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Fed Eyes New Inflation Measure: Beyond PCE?
11 Jun
Summary
- Fed Chair Warsh advocates for a trimmed average inflation measure.
- This approach excludes extreme price fluctuations monthly.
- The change could impact the Fed's 2% inflation target policy.
Federal Reserve Chair Kevin Warsh has indicated a desire to alter the central bank's approach to measuring inflation. He proposes moving away from the favored Personal Consumption Expenditures (PCE) price index towards a "trimmed average" measure. This method involves discarding prices that experience unusually large increases or decreases within a month.
The rationale behind this potential shift is to provide a clearer understanding of persistent inflation trends. Traditional measures like core PCE exclude volatile food and energy prices, but critics argue this can disconnect official figures from the public's lived experience. Professor Stephen Cecchetti noted that excluding essential expenses like food and energy, which constitute a significant portion of household budgets, can be problematic.
Economists like Michael Bryan and Cecchetti pioneered trimmed mean inflation concepts in the early 1990s. Different institutions employ variations of this method; for instance, the Dallas Fed removes a substantial percentage of outlier prices, while the Cleveland Fed uses a smaller exclusion range. Any change to the benchmark for the Fed's inflation target could have substantial implications for monetary policy.
