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- “Supercore inflation” zooms in on the prices of services, which have been persistently high.
- Fed chair Powell has touted the measure to assess better the persistently high inflation he’s targeting.
- But some economists aren’t convinced — as high prices of any goods and services affect people too.
The Federal Reserve’s got a new buzzword: “supercore inflation.”
The central bank has been mounting an escalating attack on persistent high inflation. The fight is so drawn out that the fed seems convinced that a new measure of price increases — supercore inflation — will help assess the situation better.
Supercore inflation is related to two things: the consumer price index, or CPI — the most well-known gauge of inflation in the US — and the price index for personal consumption expenditures, known as PCE.
Both measure the average price change in a basket of goods and services, but the CPI is sourced from consumers, while the PCE — which the Fed prefers — is sourced from businesses.
Because both CPI and PCE measure such a wide range of goods, the Fed and economists traditionally prefer to look at the core CPI or PCE inflation to get a better handle on price swings. This is because core CPI or core PCE excludes volatile, temporary price fluctuations in food and energy categories, and so gives a better indication of the longer-term inflation trend.
So, CPI and PCE equals the inflation of a basket of goods and services minus the food and energy inflation.
But even the core inflation measure has become less relevant for reading inflation trends in the current environment because the housing data that is used in inflation measures comes with a lag. It has also been volatile due to changing migration trends during and after the pandemic, which affected home prices and rents.
So now, the Fed’s focusing on an even narrower set of prices which further strips away the housing component from the inflation rate.
Hence, supercore inflation equals the inflation of a basket of goods and services, minus the food and energy inflation, and minus the housing inflation.
This ultra-focussed lens is what makes the set of prices in the inflation measure “supercore.”
Core services other than housing, i.e. supercore inflation, “may be the most important category for understanding the future evolution of core inflation,” Fed Chair Jerome Powell said in November.
So, what exactly is this supercore inflation Powell’s talking of? And is it all it’s cracked up to be?
What is supercore inflation? What expenses count as supercore?
In the context of the US today, supercore inflation mostly reflects the prices of services, such as those provided by lawyers, plumbers, gardeners, and hairdressers that remain stubbornly high.
The inflation measure excludes food, energy, and housing prices — all of which, in the last few years, posted price fluctuations unrelated to the regular business cycle, such as the pandemic’s impact on the supply chain and the fallout from the Ukraine war.
“Traditionally, the Fed focused on core inflation because the components were deemed to be less volatile — and by extension, transitory. The new supercore measure has gotten more attention for much the same reason — that it strips out components that have recently behaved in a manner that exaggerates true underlying inflation,” Jamus Lim, an associate professor of economics at business school ESSEC in Asia Pacific, told Insider.
But this definition could change depending on the context. “Truth be told, there isn’t a commonly-accepted definition of supercore inflation,” said Lim.
Why is the Fed paying attention to supercore inflation right now?
The concept has become more popular in the US after being touted by Powell and top economist and Nobel laureate Paul Krugman. They argue that components that cause unusual spikes in the inflation rates should be removed from inflation measures.
“These ‘stickier’ prices are typically more stable than energy and housing costs, and can better indicate the direction of prices in the US economy,” Leonard Eng, a senior manager at TD Ameritrade Singapore’s trade desk, explained to Insider.
The Fed’s focus on “supercore” categories also zooms in on the cost of labor, so the central bank can better gauge the impact of wages on prices.
For instance, prices of haircuts and personal grooming services rose fell from January to December 2022 from a year ago, according to a Wall Street Journal analysis. In comparison, prices of televisions in the same period, highlighting that the issue with persistent inflation could be due to the rising prices of services rather than goods.
“In a tight labor market, companies are forced to pay higher wages to retain employees, and this will in turn push companies to pass on these higher labor costs to end consumers. This will further fuel inflation and encourage further wage hikes,” Eng added.
Why should I care about supercore inflation?
Simply — it’s about the economy and so, it impacts your wallet. After all, the Fed’s rate decisions have been a major driver of the market volatility — and interest rate decisions, such as mortgages — in recent months.
The Fed has already raised interest rates eight times since early 2022 to tame soaring inflation, making the cost of borrowing for anything from mortgages to credit cards more expensive — which is theoretically supposed to encourage people to save rather than spend and cool the economy.
As the Fed’s looking at the more stubborn “supercore” areas contributing to the lofty prices, it means they could still hike rates even if housing costs and rents start to drop.
On March 7, Powell signaled the central bank is likely to hike rates higher than previously expected as there is “little sign of disinflation thus far in the category of core services excluding housing.”
“To restore price stability, we will need to see lower inflation in this sector, and there will very likely be some softening in labor market conditions,” he said, alluding to a slowdown in the economy that is likely to cool the jobs market.
“As long as supercore inflation remains elevated, the Fed will have to continue to use their policy tools to bring those measures down,” said Shawn Cruz, the head of trading strategist at TD Ameritrade. “At some point, this may come at the expense of inducing an economic recession, which would impact companies across all sectors to some extent.”
The US PCE inflation rate was 5.4% higher in January compared to the previous year, while core PCE was up 4.7%, according to the Bureau of Economic Analysis. The bureau doesn’t release the supercore inflation rate, but the First Trust investment management firm puts it at a 4.6% increase from a year ago.
The Fed’s inflation target is 2%, so inflation is still too high no matter which measure you take.
“Supercore inflation is still way too hot, but it has begun to cool off, and all signs point to it and overall inflation getting back to something more comfortable over the coming 12-18 months,” Mark Zandi, Moody’s Analytics chief economist, told CNN in February.
Not all economists think supercore inflation is all it’s hyped up to be
But not all economists are convinced about the focus on supercore inflation.
“I would personally refrain from focusing too much on this measure. After all, expensive housing and transport —and, for that matter, food, and fuel — affects the cost of living of people, too,” said ESSEC’s Lim.
“I’ve yet to meet a consumer who isn’t affected by these, so by excluding them in a target measure, who exactly is the Fed, or any other central bank, trying to help in its inflation measure,” he said.