Viewpoints

Fed Chair Nominee Kevin Warsh intends to link the Fed's inflation target to median or "trimmed" price measures. These measures are a statistically manipulated version of reported inflation, creating an "alternative reality." They are the 2000s version of Arthur Burns' 1970s core inflation. If implemented, this would be the fourth time inflation measures used for policy have been dumbed down, primarily benefiting the finance sector, as it would create the impression of a lower underlying inflation rate, thus justifying low official rates.

Median and "trimmed" price measures remove the tails, or the items that record the highest and lowest price changes in a given period. These price measures are deceptive because they remove the extremes in the price distribution. During inflation cycles, the upper tail for items with significant price increases is much larger than the lower tail.

Median and "trimmed" price measures represent a more extreme version of former Fed Chair Arthur Burns' "core inflation," which excluded energy and food prices from the overall measure.

Government statisticians, with the help of Congress, have already removed the largest and most volatile core inflation items, house prices, mortgage and consumer loan interest rates, in the early 1980s and the late 1990s.

Under Greenspan's leadership, the Fed made another effort to dumb down inflation for policy purposes by selecting a hybrid price measure, the PCE deflator, as its preferred price target. The Fed never admitted that nearly one-third of the PCE price index is not derived from market prices or consumer-paid prices.

Choosing the PCE over the CPI was a convenient and potentially political method to produce a lower price index. This choice made it easier for the Fed to say it was achieving or close to its inflation target, thereby allowing it to maintain lower official rates than would otherwise be possible.

Price indexes are intended to accurately reflect the changes in the prices of the "conditions" they measure. However, government statisticians and Congress, with assistance from the Fed, continually alter these "conditions," not to enhance accuracy, but to create a lower index.

If Mr. Warsh is chosen to head the Fed, he is likely to succeed in adjusting the Fed's inflation target to these price indicators. The main beneficiary would be "finance," where Mr. Warsh previously worked, on and off, for the past 20 years.

The Fed advocates for its independence, yet how can it defend its "independence policy" when it implements or alters policies that mainly benefit industries where numerous members have worked or might work after leaving the Fed?

While the press is filled with stories about the biggest oil supply shock ever and crippling gasoline prices, the economic data look fine so far. Nonetheless, I’m getting more, not less, worried.

So far, so good

The business press is loaded with stories about how the rise in energy (and related) prices is a huge shock to the economy. There are endless articles about how $4/gal gasoline prices are devastating to households. And perhaps warning comes from none other than the International Energy Agency. They are all over the press arguing that this is “the largest supply disruption in the history of the global oil market.”

And yet, seemingly miraculously, the US economy seems fine. Most March indicators were solid. Payrolls surprised to the upside and jobless claims remain low by historical standards. suggesting low layoffs. The various purchasing managers indexes are healthy. The only ugly data is the chronically weak consumer confidence surveys. Overall, trendlike growth of 2% or so seems to continue. What gives?

Time

The first thing to note is that there are lags between the onset of the shock and the impact on the data. It takes time to change behavior—people tend to look through temporary shocks. Moreover, current data releases measure where the economy was in the middle of March. April data should show some (small) impact.

A small shock so far

Despite the warnings from the IEA, so far this is a small shock by historical comparisons. It makes no sense to measure an oil shock looking only at the peak amount of supply disrupted. The duration of the disruption is more important. It is the cumulative amount of oil taken off the market that matters. A short disruption is cushioned by inventories and the consumer response to a short price spike will be small. The size and duration of today’s price shock isn’t even close the recent Russian shock, let alone the 1970s oil shocks (chart).

The Federal Reserve Bank of Philadelphia’s state coincident indexes in January were generally soft. In the one-month changes, California was the only state to have an increase as high as .50 percent, while 14 recorded declines. Over the three months ending in January, there were four states with increase of more than 1 percent (California was highest, with a 1.20 percent gain), but 13 were down, with 3—Montana, Delaware, and West Virginia—off by more than 1 percent. Over the 12 months from January 2025 to January 2026, five states were down (West Virginia by a very large 4.37 percent), and 7 others had increases of less than one percent. Only 3 states saw increases of 3 percent or more, with Nevada’s 3.76 percent at the top.

The independently estimated national estimates of growth over the last three and twelve months were, respectively, .61 and 1.78 percent. Both seem to be in line with what the state numbers would have suggested.

This note assesses how the surge in oil prices affects inflation and the general price level, and how the Fed may respond.

The general price level is the cost of a basket of goods and services in either the Consumer Price Index or the Personal Consumption Price Index. (For both baskets, the Bureau of Economic Analysis adjusts retail prices of goods and services for estimated changes in quality). Inflation measures the percentage increase in either the CPI or PCE Price Index; deflation measures the percentage decline in the index. Chart 1 shows the monthly percentage changes in the CPI and PCE Price Index in the last several years and Chart 2 shows the yr/yr change.

As is well known, the oil price spike is a negative supply shock that dents the real economy and generates a one-time rise in the general price level that temporarily raises the monthly inflation data but is not inflationary. How long are these temporary impacts expected to last? This depends largely on how long the oil prices stay high. But so far, the rapid responses of retail energy prices to the spike in crude oil prices suggest that the impact on the monthly inflation data will run their course quickly, in 2-3 months. The monthly inflation data should subsequently simmer down to their pre-Middle East conflict pace of increase, while the year-over-year percentage increases in measured inflation absorb the temporary bulge. If oil prices fall back to their pre-conflict $65/barrel, then the monthly changes will turn negative and the general price level will recede to the level its pre-conflict rate of increase would have taken it.

The oil price spike raises costs of energy, so consumers will spend more for energy products (historically, the demand is fairly price inelastic in the short run) and will have less to spend on non-energy goods and services. The oil price bulge and Middle East conflict has hit confidence and raised uncertainty (the University of Michigan consumer sentiment index fell sharply in its latest April meeting) and interest rates a bit. In addition, the higher energy costs will raise business operating costs, which may raise the prices of selected consumer products a bit. As a result, the oil price spike will generate a deceleration of nominal GDP. A larger portion of that aggregate demand will be inflation and a lower portion real.

The Fed properly recognized the oil price spike as a negative supply shock and wisely decided to keep monetary policy on hold at its March FOMC meeting. The Fed funds futures market expects the Fed will be on hold at its late April meeting, which is scheduled to be Chair Powell’s last. The Fed rarely admits mistakes, but it largely acknowledges that its accommodation of the oil price shocks of the 1979s contributed to persistently excess demand and dangerously high inflation and inflationary expectations and bond yields.

Two observations are important about the recent spike in oil prices. First, reflecting the U.S. shale revolution and surge in production of oil and natural gas, which has made the U.S. net energy independent in the aggregate (even though certain regions in the nation have regulations that constrain oil drilling and refining and distribution, forcing them to rely heavily on imported energy—particularly California), gasoline and other energy sources remain in ready supply—only at higher costs. That’s starkly different than the 1970s, when gasoline was scarce and rationed.

Second, retail energy prices have been adjusting quickly to the higher oil prices. As shown in Chart 1, through April 10, while oil prices have risen to $96.50/barrel from $65, a 48% increase, retail gasoline prices nationally have risen to $4.15/gallon, up from $2.97, a 40% rise. Before the Middle East conflict, there was backwardation in the oil price futures curve—the markets had priced in a gradual decline in oil prices from their then-current prices. (After the oil price surge, markets have priced in expectations that prices will fall back toward their earlier price level by later in 2026, but maintain a risk premium.) Prices of other refined oil products have risen even faster: diesel fuel have risen from $3.75/gallon to $5.68, a 51% increase.

The US economy is neither in a “Golden Age,” as Trump supporters argue, nor is it regularly flirting with recession, as Trump critics argue. In reality, Administration polices have contributed to “stagflation”—a combination of below-trend growth combined with persistent above-target inflation. An even bigger test lies ahead, with a significant risk of a major energy shock.

Presidential report cards

In comparing Presidential regimes, a common approach is to average growth and inflation over the four years in office. Of course, this ignores other drivers of the economy, and the lagged effect of policies from the prior President.

Trump’s Presidency is different. He took “ownership” of the economy out of the gate, with sharp shifts in economic policy. In the process Congress was largely sidelined and Fed policy became secondary. This has been Trump’s economy from the get-go.

Let’s briefly look at how five kinds of policy shifts—trade, immigration, tax cuts, deregulation and war have impacted the demand and the supply-side of the US economy.

Demand damage

The impact of Administration policies on spending and demand has been mixed. The good news is that income tax cuts tend to stimulate consumer spending and corporate tax cuts tend to stimulate investment. Unfortunately, these positive effects have been canceled out by the dramatic increase in consumer and business uncertainty.

The chart below shows a news-based measure of policy uncertainty from Bloom and others. There has been a massive spike in policy uncertainty in general and trade policy uncertainty in particular. The later is much higher than during the first trade war. This has put sand in the gears of the economy, with firms reluctant to hire and invest and households reluctant to spend. This is one of the reasons why business investment, outside of data centers, has remained weak and manufacturing jobs have declined.

State real GDP growth rates in 2025:Q4 ranged from -8.3% in DC to 3.8% in North Dakota. The plunge in DC was related to the federal shutdown (Maryland also had a marked decline). North Dakota was an outlier on the other side, reflecting a pickup farm output. Most states had sluggish growth rates within a point of the nation’s .5%.

Personal income growth rates ranged from -4.0% in North Dakota to Hawaii’s astronomical 41.5%. Hawaii’s gain was the result of a large settlement payment related to the 2023 Maui wildfire. North Dakota’s loss stemmed from a sharp drop in earnings (compensation plus proprietors’ income). Most states saw gains trailing the national growth rate of 3.4%; with the exception of California the larger states typically saw higher growth rates.

On February 28 the US and Israel launched airstrikes on Iran. In retaliation, Iran closed the Straits of Hormuz. By early April the average US price of regular gasoline jumped to $4.11/gallon from $2.93/gallon in February, an increase of 40%.

To put this price shock in historical perspective, I: defined the real price of gasoline as the price index for personal consumption expenditures (PCE) on gasoline (and other motor fuels) over the price index for total PCE; calculated monthly percent changes in this real price of gasoline; weighted each of those changes by the geometric average of the current and lagged monthly shares of nominal gasoline purchases in total nominal PCE; cumulated the weighted price changes from January of 1960 to the present.