Inflation has hit its highest level in three years, according to fresh data released this week. However, new Federal Reserve Chair Kevin Warsh wants the central bank to focus on different measures. Warsh prefers to look at trimmed-mean averages, which can give investors and policymakers a better sense of inflation’s breadth and direction.

Alternative Inflation Gauges

The Federal Reserve Bank of Dallas produces one trimmed-mean gauge that shows annual inflation of 2.3% in April. A similar estimate from the Cleveland Fed puts annual inflation in May at 2.9%. In contrast, the May CPI came in at 4.2%, while the Producer Price Index reached a more-than-three-year high of 6.5% in May.

Warsh argues that officials should take filtering noisy data a step further. The trimmed-mean rate removes, or trims, the most extreme outliers from core inflation before averaging to smooth out more volatility. However, some economists say Warsh’s arguments are unconvincing, and that inflation is now pointing firmly higher.

Implications for Interest Rates

The Fed next week is widely expected to hold its benchmark lending rate steady for the fourth consecutive meeting but potentially signal that rate hikes are on the table because of worries about faster inflation. If Warsh persuades his fellow policymakers to weigh different inflation measures instead, the bank could keep rates where they are — or even lower them — risking a bigger jump in price increases.

Original reporting: KTVZ (Central Oregon) — read the source article.