A St. Louis Fed economist is pitching a surgical tweak to the Federal Reserve’s preferred inflation gauge that would make underlying price pressures look meaningfully cooler. The proposal would carve only energy goods out of the "core" personal consumption expenditures index, keep food in the mix, and, in a test run, pulls May’s reading down sharply. The idea is landing just as the Fed’s new leadership publicly rethinks how it measures inflation in the first place.
St. Louis Fed paper: a narrow technical fix
Fernando Martin, a senior economic policy adviser at the Federal Reserve Bank of St. Louis, lays out the idea in research that argues energy goods are the standout source of volatility and can be removed without sacrificing much useful information, according to Reuters. In Martin’s recalculation for May, the "core" figure lands around 3.42%, and his alternate headline reading is roughly 3.36%, both below the official 4.1% May estimate in his analysis. Martin likened the method to "using a scalpel," and his affiliation appears on the St. Louis Fed website St. Louis Fed.
How trimmed measures compare
Economists also lean on trimmed mean and median measures that deliberately cut extreme price moves to uncover the underlying trend. The trimmed mean PCE, produced using Dallas Fed methodology, effectively drops about 55% of the spending basket under its cut offs, according to a Federal Reserve Bank of Cleveland explainer on these methods. That helps explain why a narrow energy exclusion and trimmed averages can send different signals. Trimmed means discard many fast moving components, while Martin’s approach leaves more of the consumption basket in place. Each method trades off responsiveness against stability in its own way.
Why it matters for Fed policy
The current "core" PCE series, published by the Bureau of Economic Analysis, is explicitly designed to remove food and energy from the index, so any adjustment to that setup would matter for how the FOMC reads inflation data, per the Bureau of Economic Analysis. A narrow tweak that keeps most consumer spending, while filtering out noisy energy swings, could pull down the "underlying" inflation numbers that feature in policy debates. It is surfacing just as the Fed has convened outside panels to review data and frameworks. Chairman Kevin Warsh has launched task forces to revisit pieces of the Fed’s measurement and policy architecture, according to reporting on the policy review Axios.
Market and real world tradeoffs
If policymakers adopted Martin’s setup, it could trim headline or "underlying" readings and ease some pressure on rate decisions. Critics point out that any metric that strips out pass through effects from energy risks downplaying how higher fuel and utility costs ripple into other prices. Martin’s note also highlights a relatively small direct share for energy goods, under about 3% of the consumer basket in his accounting, although their volatility can still wash through services and goods, according to Reuters. Policymakers will have to balance statistical clarity against the inflation many households feel in their day to day bills.
What’s next
Martin’s proposal adds another wrinkle to a debate the Fed is handing to its task forces and staff. Any change to official series would need careful vetting, internal review, and plain language explanations before it could be adopted. Analysts expect the process to be gradual, with panels weighing statistical advantages against communication headaches in FOMC briefing papers. For now, the paper gives policymakers a clean technical option to consider as they argue over whether it is the data or the definition of inflation that needs the bigger overhaul.
