It's the newest buzz word on Wall Street, so what exactly is supercore inflation?
What is Supercore Inflation?
It’s the Fed’s new favorite inflation gauge, so what exactly is it and why is it important?
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What Is Supercore Inflation?
It’s the Fed’s new favorite inflation gauge, so what exactly is it and why is it important?
By Brian Whitton and Dion Rabouin
https://twitter.com/noslouch
brian.whitton@wsj.com
https://twitter.com/DionRabouin
Updated Jan. 31, 2023 3:05 pm ET
You may be familiar with the consumer price index, the most well-known measure of U.S. inflation. You may even know about core inflation, which strips out food and energy prices that tend to be volatile. Since November, the Fed has focused on an even narrower measure to guide interest-rate policy: supercore inflation. So what exactly is it?
Supercore inflation is currently around 4.1%
In the grid below you can see all of the segments that make up supercore and how prices have changed over the past three months at an annualized rate.
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What is supercore?
The name is a nod to the Fed’s focus on a slimmer set of prices that remain stubbornly high. Supercore inflation comprises the price of services — things such as barbers, lawyers or plumbers — excluding energy and housing. ... It’s the Fed’s new favorite inflation gauge as it tries to diagnose the pace of inflation and the current and future health of the U.S. economy. ... Fed Chair Jerome Powell has said that it “may be the most important category for understanding the future evolution of core inflation.”
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The Fed focuses on inflation in services because those prices are more likely to be driven by the cost of labor, which the Fed can more easily control with interest rates. Higher rates tend to slow the economy and cause companies to slow hiring or begin layoffs. The price of goods, on the other hand, is more affected by global factors such as supply chain logistics. ... As the pace of overall inflation has slowed down, the Fed has shifted to focus on more complex and unusual measures such as “core services excluding housing” which is why it’s being referred to as supercore.
The measure is expected to affect the Fed’s decisions about rate increases, which decide the interest rates on credit cards, auto loans, small business loans and more. Higher interest rates matter to investors because it increases the cost of borrowing money and makes it harder for businesses to grow and consumers to spend. ... There is debate about whether using the supercore measure to set the Fed’s course holds merit. Some economists argue that the Fed’s path will cause an unnecessary recession.
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—Sam Goldfarb contributed to this article
Methodology
The rates of change in this piece are presented according to an analysis of Commerce Department data by The Wall Street Journal. For a given month, the Journal compared the index value to three months prior and calculated the annualized rate using a formula provided by the Federal Reserve Bank of Dallas.
The so-called “supercore” index is derived by removing the Housing index from the PCE Services excluding Energy index, also known as Core Services. We estimate Housing’s contribution to Core Services inflation using the Commerce’s Department’s nominal consumption data.
= new reply since forum marked as read
I know that the Fed has historically targeted core PCE not core CPI, but it will take some spreadsheet work to get 12 months of PCE and core PCE numbers and more time to construct the graphs. But graphs of the last 5 months of both the PCE and the Core PCE is at: https://www.democraticunderground.com/10143025190#post11
Now back to the CPI:
Last 6 months ANNUALIZED:
CPI: +1.9%
CORE CPI: +4.6% < == Last 3 months: 3.2% annualized
CPI - https://data.bls.gov/timeseries/CUSR0000SA0&output_view=pct_1mth
CORE CPI - http://data.bls.gov/timeseries/CUSR0000SA0L1E&output_view=pct_1mth
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As for why the Fed prefers core inflation (i.e. without food and energy) over full measure inflation, I cover that in #10
https://www.democraticunderground.com/10143025190#post10
Basically, the energy and food are quite volatile from month to month, especially energy. That makes the full measure CPI jump around. The Fed doesn't want to go crazy raising interest rates in months when energy jumps, and dropping interest rates like crazy when energy prices drop bigtime. Rinse and repeat.
I've seen a multi-decade graph with both core CPI and full measure CPI together on the same graph. Basically, the core CPI looks like a smoothed out version of the full measure CPI, while the latter oscillates around the core CPI.
While my chart above is not multi-decade, but rather just one year, it is clear that full measure CPI is quite more volatile than core CPI.
Note also, incidentally, that during the first 6 months of 2022, the full measure CPI averaged much more than the core CPI. In the last 6 months of the year, the opposite was true.
As for what people have experienced and are experiencing, and whether wages are keeping up, the full measure CPI is the only relevant measure. Its for projecting out inflation in the future that the core is preferred.
As for shelter aka housing -- that's rent and owner's equivalent of rent. That one is sticky, e.g. currently those measures are still going up, because leases signed several months ago when they were going up are still in effect. But new leases have been going down. The housing stuff is covered in the old inflation Megapost at: https://www.democraticunderground.com/10143007428#post2