The current inflation divergence - trimmed mean versus core PCE

The preferred inflation measure for the Fed is core PCE. The idea behind using a core measure is that it filters out extremes that may be driven by supply shocks. Fed Chairman Warsh has a different preferred measure: the trimmed mean, which includes food and energy but removes extreme values, both high and low, from the inflation index. If food and energy are on the high end, those prices will be trimmed, but that need not be the case. 

History shows that the trimmed mean is smoother and will lag the core PCE, but now we are seeing something different: the core PCE is rising while the trimmed mean is falling. Which one you place more stock in will drive your decision on Fed action and the direction of rates.

There will be politics over whether Warsh will be able to get others on board with the trimmed-mean measure, and that will determine any Fed action.