Kevin Warsh gave his preferred way for measuring inflation. It could come back to bite him

Kevin Warsh, President Donald Trump's nominee for Federal Reserve chair, told lawmakers that he would like the central bank to change its strategy for measuring inflation.

But Bank of America economist Aditya Bhave warned Wednesday that such a reconfiguration — part of a broader “regime change” that Warsh has promised for the central bank — might not pan out as he hopes.

The Fed has long favored the core price index for personal consumption expenditures, known in short as the core PCE, because it excludes volatile food and energy prices.

But Warsh wants to go a step further, by rooting out extreme price shocks when calculating overall inflation.

“What I'm most interested in is: What's the underlying inflation rate? Not: What's the one-time change in prices because of a change in geopolitics or change in beef?” Warsh said at his Senate hearing Tuesday.

“The measures I prefer are looking at things that are called trimmed averages,” Warsh added. “We take out all of the tail-risks, all of the one-off items, and we ask ourselves whether the generalized change in prices is having second-order effects on the economy.”

Under Warsh's system, Bank of America's Bhave said, inflation today does look softer. The bank found a 12-month inflation gauge that's using the trimmed method would have a mean of 2.3% and median of 2.8% as of February. By comparison, core PCE sat at 3%.

Warsh called the current trend in inflation “quite favorable” during Tuesday's hearing.