A key inflation measure favored by new Federal Reserve Chair Kevin Warsh cooled again in April, even as Americans continue dealing with stubbornly high prices and Fed officials grow more divided over whether inflation is actually easing.
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 improved. But economists behind the measure are warning it may now be understating how much pricing strain is still moving through the economy.
The effect is already showing up outside the Federal Reserve. Borrowing costs remain high, businesses are staying cautious with hiring and investment, and markets are becoming more sensitive to signs that interest rates could stay restrictive longer than expected.
Fed’s Preferred Inflation Signal Faces Growing Doubt
The Dallas Fed’s trimmed mean gauge is designed to filter out extreme price swings and show a steadier view of inflation underneath the monthly volatility.
In more stable periods, the measure has generally worked well. But recent tariff-driven price increases have spread across a much larger share of goods, changing the way the index behaves. Dallas Fed economist Tyler Atkinson said the formula may now be cutting away too much of the inflation movement that policymakers are trying to measure.
That leaves the Fed trying to judge whether inflation is genuinely cooling or simply appearing calmer in one set of data while costs continue rising elsewhere.
The problem reaches beyond policymakers. Mortgage costs remain uncomfortable, credit card rates are still weighing on household budgets and many businesses are becoming more selective about expansion plans as financing stays expensive.
Inflation Is Still Running Hot in Key Areas
Another inflation measure watched closely by the Fed is telling a far less reassuring story.
Core personal consumption expenditures inflation, which excludes food and energy, rose 3.3% in the 12 months through April, the fastest pace since 2023. Fed Governor Lisa Cook said the measure was “clearly moving in the wrong direction.”
Consumers are not really experiencing a cooler inflation environment yet. Grocery bills, borrowing costs and everyday expenses remain elevated enough that many households are continuing to pull back discretionary spending where they can.
That is helping create a more uneasy backdrop for the economy. Businesses are watching demand carefully, investors are reacting nervously to changing rate expectations and confidence around the inflation outlook no longer looks as steady as it did earlier this year.
Tariffs Are Distorting the Inflation Picture
Part of the issue stems from tariffs imposed over the past year, which have pushed up prices across a broader range of goods instead of isolated categories.
That matters because the Dallas Fed measure was built around a market environment where unusually sharp price spikes were less widespread. Now that increases are appearing across more parts of the economy at once, the formula may be producing a softer inflation reading than conditions justify.
Analysts at Standard Chartered said it is difficult to argue that the disinflation signaled by the trimmed mean is real, noting that core PCE has historically been a stronger predictor of future inflation trends.
The Dallas Fed said it does not plan to change the methodology, arguing the distortion could fade if tariff-related price increases ease in coming months.
Right now though, even officials inside the Fed do not appear fully aligned on how serious the inflation problem still is. Prices are still rising faster than policymakers want, borrowing remains expensive and markets are becoming increasingly reactive to signs that the path back to price stability may take longer than expected.
The uncertainty is already starting to change behavior. Households are becoming more careful with spending, businesses are delaying some investment decisions and investors are adjusting to the possibility that higher rates and elevated costs may remain part of the economic picture deeper into the year.
