‘Super Core’ Inflation Measure Shows Fed May Have Real Problems

Better-than-expected consumer price index data roiled markets on Wednesday, but markets are fussing over an even more specific measure of prices contained in the data – the so-called above-core inflation measure.

Along with headline inflation, economists also look at the core consumer price index, which strips out volatile food and energy prices, to determine the true trend. The Supercore indicator, which also excludes housing and rental costs from its service readings, goes one step further. Fed officials say that’s helpful in the current environment because they view elevated housing market inflation as a temporary problem rather than a good indicator of underlying prices.

Supercore accelerated to 4.8% annualized in March, its highest in 11 months.

Tom Fitzpatrick, managing director of global market analysis at RJ O’Brien & Associates, said that if you take the last three months of data and annualize it, you’ll see an above-core inflation rate of more than 8%, far from what was forecast. level. The Federal Reserve’s target is 2%.

“As we sit here today, I think they’re probably tearing their hair out,” Fitzpatrick said.

The consumer price index rose 3.5% year over year last month, beating the Dow Jones estimate of a 3.4% rise. The data weighed on stocks and pushed Treasury yields higher on Wednesday, while also pushing futures market traders to shift expectations for the central bank’s first rate cut to September from June, according to CME Group data. FedWatch Tool.

“At the end of the day, they don’t care as long as they get to 2%, but the reality is you can’t get to a sustainable 2% unless you get that key cooling in the service industry.” Prices, [and] we don’t see that at the moment,” said Stephen Stanley, chief economist at Santander US.

Wall Street has been acutely aware of the trend caused by above-core inflation since the beginning of the year. The rise in the reading since January’s CPI reading was enough to prevent the market from “perceiving that the Fed is winning the battle against inflation.” [and] this question will remain open in the coming months,” said Jan Lingen, head of US betting strategy at BMO Capital Markets.

Another challenge for the Fed, Fitzpatrick said, is the different macroeconomic backdrop of demand-driven inflation and powerful stimulus payments that allowed consumers to increase discretionary spending in 2021 and 2022 and contributed to record inflation.

Today, he added, the picture is more complex because some of the most persistent components of service inflation are essentials such as auto and home insurance and property taxes.

“They’re so scared about what happened in 2021 and 2022 that we’re not starting from the same point as other times,” Fitzpatrick added. “The problem is that if you look at all this [together] These are not discretionary items of expenditure, [and] it puts them between a rock and a hard place.”

Further complicating matters, falling consumer savings rates and higher borrowing costs make the central bank more likely to maintain contractionary monetary policy “until something breaks,” Fitzpatrick said.

He warned that it would be difficult for the Fed to reduce inflation by raising rates further because current drivers are more resilient and less sensitive to monetary tightening. Fitzpatrick said the recent increase in inflation is more akin to tax increases.

While Stanley believes the Fed is still a long way from raising interest rates further, it remains possible as long as inflation remains above its 2% target.

“I think overall inflation will come down and they will cut rates later than we thought,” Stanley said. “The question is, are we looking at what is ingrained here? At some point, I believe the possibility of rate hikes will come back into focus again.”