An increasing number of our neighbors are now retired. As they have made that transition, their sensitivity to the costs of living has increased, as has their skepticism over the way that inflation is measured. A common refrain: “I don’t care what the numbers say…things are REALLY expensive these days!”
Our perception of inflation is a personal one, depending on where we are in life and what we are buying. At the macro level, there is a range of perceptions among economists on the correct rate of inflation. The debate over which to focus on may be renewed as Kevin Warsh assumes leadership at the Federal Reserve.
The consumer price index (CPI) and the deflator on personal consumption expenditures (PCE) are the two leading inflation indicators. A comparison of the two can be found here. Policymakers often focus on core measures, which remove food and energy prices, as these components can be volatile and are less sensitive to monetary policy.
Incoming Fed Chair Kevin Warsh, however, has touted “trimmed-mean” inflation measures, which eliminate categories showing the most extreme monthly movements in each direction. The Federal Reserve Bank of Dallas’ trimmed mean index excludes items that show the lowest 25% and the top 30% of price changes.
Since 2019, trimmed mean measures have typically been lower than core rates of change in the CPI and in the PCE deflator. In the most recent readings, the core PCE had increased 3.3% over the past 12 months, while the FRB Dallas trimmed-mean measure was up only 2.4%.
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Proponents of trimmed-mean measures note that food and energy aren’t the only volatile categories of consumer prices; each month, extremes can be seen in a range of other categories. One-time increases in the price level, such as those resulting from supply shocks, are given less weight. Revisions to trimmed-mean gauges are typically smaller.
Skeptics of the trimmed-mean approach note that it excludes a large fraction of consumer prices, and point to their lagging behavior during the post-pandemic period. Some have expressed concern that Warsh may be “cherry-picking” the metric showing the lowest inflation rate to make a case for easing monetary policy.
My neighbors insist that the inflation rate is at least 5%. No documentation is offered, but no amount of data will dissuade them. My strategy is to avoid the subject…at all costs.
Carl Tannenbaum is the Chief Economist for Northern Trust.
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