The “supercore” inflation measure shows that the Fed may have a real problem

A warmer-than-expected consumer price index roiled markets on Wednesday, but markets were buzzing about an even more specific price level captured in the data: so-called supercore inflation.

In addition to the general inflation measure, economists also look at the core CPI, which excludes volatile food and energy prices, to find the true trend. The supercore meter, which also excludes the costs of accommodation and rent from the services readout, goes one step further. Fed officials say this is helpful in the current environment because they view high housing inflation as a temporary problem and not a good gauge of underlying prices.

Supercore accelerated to an annualized pace of 4.8% in March, the highest in 11 months.

Tom Fitzpatrick, managing director of Global Market Insights at RJ O’Brien & Associates, said if you annualize the past three months’ readings, you’re looking at supercore inflation of more than 8%, a far cry from the Federal Reserve’s 2% target.

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

The CPI rose 3.5% year over year last month, above the Dow Jones estimate that called for 3.4%. The data put pressure on stocks and sent U.S. Treasury yields rising on Wednesday, forcing futures traders to extend their expectations for the central bank’s first rate cut from June into September, according to figures from CME Group. FedWatch tool.

‘In the end, it doesn’t matter much to them, as long as they only achieve 2%, but the reality is that you are not going to achieve that sustainable 2% if you do not get a significant reduction in service prices. , [and] at the moment we don’t see it,” said Stephen Stanley, chief economist at Santander US

Wall Street has been keenly aware of the trend coming from supercore inflation since the beginning of the year. An increase in the measure versus January’s CPI print was enough to hamper the market’s perception that the Fed was winning the battle against inflation. [and] This will remain an open question in the coming months,” said Ian Lyngen, head of US rates strategy at BMO Capital Markets.

Another problem for the Fed, according to Fitzpatrick, lies in the divergent macroeconomic backdrop of demand-driven inflation and robust stimulus payments that allowed consumers to ramp up discretionary spending in 2021 and 2022 while stoking record levels of inflation.

Today, he added, the picture is more complicated because some of the most persistent components of services inflation are household necessities, such as car and home insurance, as well as property taxes.

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

The backdrop is further complicated by falling consumer savings rates and higher borrowing costs, making the central bank more likely to keep monetary policy restrictive “until something breaks,” Fitzpatrick said.

The Fed will have a hard time reducing inflation with more rate hikes because current factors are more persistent and not as sensitive to tighter monetary policy, he warned. Fitzpatrick said the recent upward moves in inflation more closely correspond to tax increases.

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

“I think inflation will generally come down and interest rates will be cut later than we thought,” Stanley said. “The question becomes: are we looking at something that has become entrenched here? At some point I can imagine that interest rate increases will come back into the picture.”