A key inflation measure endorsed by new Federal Reserve Chairman Kevin Warsh cooled again in April, just as Americans continue to grapple with higher inflation and Fed officials grow increasingly divided over whether inflation is actually slowing.
The Dallas Fed’s trimmed mean inflation gauge showed year-over-year inflation at 2.3% in April, down from 2.4% in March. On the surface, that supports Warsh’s argument that inflation has gotten better. But economists behind the move warn that it may now be unclear how much of the price crisis is still lingering in the economy.
The effect is already coming from outside the Federal Reserve. Borrowing costs remain high, businesses remain cautious about hiring and investment, and markets are sensitive to signs that interest rates may remain constrained for longer than expected.
Fed’s Preferred Inflation Signal Faces Growing Skepticism
The Dallas Fed’s cut rate gauge is designed to filter out extreme price swings and show a strong view of inflation below monthly volatility.
In stable periods, the ratio has generally worked well. But the recent tariff-driven price hikes have spread across a much wider range of goods, changing the way the index behaves. Dallas Fed economist Tyler Atkinson said the formula is now likely to cut too much of the inflation that policymakers are trying to measure.
That leaves the Fed trying to judge whether inflation is actually cooling or just appearing calm in one set of data while costs continue to rise elsewhere.
The problem reaches beyond policy makers. Mortgage rates remain uncomfortable, credit card rates are still tough on household budgets and many businesses are choosing to be more selective about expansion plans as financing remains expensive.
Inflation is still running hot in key areas
Another inflation measure closely watched by the Fed tells a less reassuring story.
Personal consumption inflation, which excludes food and energy, rose 3.3% in the 12 months to April, the fastest pace since 2023.
Consumers haven’t really experienced a cooling climate for inflation yet. Grocery bills, mortgage costs and everyday expenses remain high enough that many households continue to put off discretionary spending where they can.
That helps create an uneasy economic backdrop. Businesses are looking at demand carefully, investors are reacting with fear to changes in the expected rate and confidence about inflation no longer looks as stable as it was earlier this year.
Taxes Distort the Depreciation Picture
Part of the issue stems from tariffs imposed last year, which raised prices across a range of goods rather than individual categories.
That’s important because the Dallas Fed rate was created in a market environment where unusually sharp rate hikes were less widespread. Now that the increase is seen in all parts of the economy at the same time, the formula may produce a softer inflation reading than conditions allow.
Analysts at Standard Chartered say it’s hard to argue that the disinflation signaled by the trimmed mean is real, noting that core PCE has been a strong predictor of future inflation trends.
The Dallas Fed has said it does not plan to change course, saying the distortion could end if the rate-related rate rises more easily in the coming months.
Right now, though, even officials within the Fed don’t seem to be fully on board with how big the inflation problem still is. Prices are still rising faster than policymakers want, borrowing remains expensive and markets are increasingly reacting to signs that the path back to price stability may take longer than expected.
Uncertainty is already beginning to change behavior. Households are more cautious about spending, businesses are holding back investment decisions and investors are bracing for the possibility that higher prices and higher costs may remain part of the economic picture later in the year.
