Kevin Warsh’s troublesome inflation in-tray

May 27th 2026|Washington, DC|5 min read

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KEVIN WARSH’S first day in his new job on May 22nd was instructive. For the first time in nearly 40 years, the chairman of the Federal Reserve was sworn in at the White House—an odd setting for the head of an institution that prides itself on political distance. Donald Trump nevertheless assured his hand-picked inflation dove that he should be “totally” independent. Hours later, at a rally in New York, the president sketched the boundaries of that independence. “I had a rotten head of the Fed, now I have a great head of the Fed,” he boasted, before predicting that interest rates would come down “very quickly”.

Yet the path to lower rates has narrowed since he nominated Mr Warsh in January. As war in Iran pushed up energy prices, America’s consumer-price index (CPI) rose at an annualised pace of 7.3% in the three months to April. Pricier oil is feeding into other costs, from plastics to transport, inflating prices far from the pump. Even excluding energy and food, CPI is up by a hot 3.2%. The central bank’s preferred gauge of underlying inflation is hotter still.

At his confirmation hearing in April, Mr Warsh told Congress he was not interested in “the one-time change in prices because of a change in geopolitics”. Central bankers are usually taught to “look through” energy shocks, since these may lift prices once without stoking underlying inflation—so long as they do not provoke the public to expect higher inflation in future. But one-offs are easier to ignore when they are brief. The war in Iran has already dragged on, and the buffers holding down oil prices are dwindling.

Moreover, the oil shock is only Mr Warsh’s first constraint. Broadening inflationary pressures, markets sceptical of easing and a Fed committee turning more hawkish all stand in the way of his—and the president’s—rate-cutting ambitions.

Start with America’s inflation outlook, which looks grim even after stripping out energy. More than half the categories in the consumption basket are up by 3% or more this year. Services prices, which best reflect underlying demand, are also rising uncomfortably fast. “Super-core” services, which exclude energy and housing, are up in price by 3.2% in the past year and have accelerated in recent months.

Chart: The Economist

Goods are no longer providing relief. In the PCE index, durable-goods prices rose at an annualised pace of 7.7% in the first quarter of the year, compared with an average fall of 1.7% a year in 2015-19. Tariffs have delivered a temporary jolt to prices. The artificial-intelligence boom may be bringing about a more lasting one. Inflation in software and accessories (considered durable goods) is the highest since the series began in the late 1970s.

Mr Warsh has objected that conventional inflation gauges are “quite imperfect”. He has called for “new data sources”, including trimmed-mean measures that ignore extreme price moves. However, these alternatives offer little solace. Trimmed-mean indices from the Fed’s Cleveland and Dallas branches are both accelerating: one-month inflation exceeds the three-month pace, which is itself faster than over 12 months (see chart 1).

The Dallas measure does offer Mr Warsh one scrap of comfort. Over the past 12 months it is only a touch above the central bank’s target. But that is a fragile foundation for cuts. The Dallas Fed’s method trims more from the top of the price-change distribution than the bottom, reflecting historical patterns in which price declines were more extreme than increases. During inflationary surges, its researchers warn, the measure may be misleading.

Chart: The Economist

To avoid cherry-picking the most convenient measure, The Economist examined four—the two trimmed-mean estimates and two measures of core services excluding housing. To strip out the noise from the oil shock, we calculated a six-month annualised rate. Our estimate of underlying inflation in the American economy is 3.3%, well above the 2.0% average in 2015-19. More worrying, it has moved further above target in recent months (see chart 2).

Sticky inflation is starting to affect expectations. After more than five years of above-target inflation, faith in a swift return to normal takes some optimism. In May respondents to the University of Michigan’s consumer survey expected inflation of 3.9% five years ahead, almost a percentage point higher than before Mr Trump took office in January 2025. The New York Fed’s survey, preferred by many policymakers, looks more benign when respondents assign probabilities to different outcomes. But when households were asked directly about inflation five years ahead, the median answer in April was also above 3.8% (see chart 3).

Chart: The Economist

Markets are drawing similar conclusions. At the start of the year investors expected at least one or two rate cuts this year. They now price in a rate rise instead, and roughly a one-in-four chance of two or more. Treasury yields have climbed, too. Some analysts detect a “Warsh premium” in long-dated bonds, compensation for the risk that the chairman bends to Mr Trump and lets inflation run. Cut too soon, and bond vigilantes may awaken.

Mr Warsh’s colleagues may prove as troublesome. They are already turning hawkish. In April three of them dissented in favour of dropping the Fed’s “easing bias”, the language in its statement hinting that the next move is likelier to be a cut than a rise. Christopher Waller, a Fed governor, agreed in a speech on May 22nd. If the committee pushes for a rise over Mr Warsh, he will face a painful choice. Dissent as chair, and he looks weak. Fall in line, and he looks disloyal to Mr Trump.

Mr Warsh can afford to wait a bit. But the ability to blame rising prices on a brief war could vanish by September, weeks before America’s midterm elections. He would then be squeezed between a committee eyeing tighter money, markets ready to punish dovishness and a president demanding rate cuts. Mr Warsh must be hoping that at least his new chair is comfy, because his position certainly isn’t. ■

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