Understand why the US awaits inflation data with an eye on so-called “supercore” costs

If “transient” was the buzzword to define inflation in 2021, this year it is “supercore”.

Federal Reserve officials and economists were blamed for dismissing inflation as temporary at the start of the pandemic, so now they are slicing and dicing inflation data in different ways. The new favorite term: “supercore” inflation.

“Supercore” inflation is a technical term in English and refers to prices that rise when workers are paid more for their services. That is, it is not a price increase caused by an increase in production costs, such as more expensive raw materials, or a lack of an item, but rather, because some activities are paying more to those who perform them. In Portuguese, it can be translated as “supercritical”.

Think haircuts, electrical work and gardening. These prices are typically less volatile than food and energy and can better indicate the direction of prices in the US economy.

Essential services that exclude housing “may be the most important category for understanding future developments in core inflation,” Fed Chair Jerome Powell said recently.

That’s a problem: “supercore” prices have remained stubbornly high over the past few years.

Over the past year, an alphabet soup of fluctuating economic indices have become household names as American households reeled from the worst inflation in 40 years: CPI (Consumer Price Index), PPI (Producer Price Index ), PCE (Personal Consumption Expenditure and ECI (Employment Cost Index).

Each of these reports showed how food, fuel and housing prices rose much faster than wages for most of the last year, driven by huge consumer demand along with supply chain snags and the war in Ukraine.

The most popular of the monthly inflation gauges, the CPI, will be released this Tuesday (14). The January CPI is expected to have moderated to 6.2%, down from the 6.5% rate in December and well below the summer peak of 9.1%. Core inflation is forecast to slow to 5.5% from 5.7% in December.

Taken together, the series of inflation data show prices still uncomfortably high, but heading in the right direction.

But White House economists last week highlighted a wage growth stat that suggests inflation may not be as strong as the Fed believes. The “supercore” wage reading fell from 8% to just over 5% in January, according to the White House Council of Economic Advisers.

“Supercore inflation was a strong 6.4% year-on-year through December 2022, but it’s subdued,” said Mark Zandi, chief economist at Moody’s. In the three months to December, “supercore” inflation rose just 2.4% annualized and just 0.9% annualized in the month of December.

Wage growth is also subdued, Zandi said, a good sign for future “supercore” inflation.

“The Fed focuses on the supercore because it includes prices that are most likely to be driven by the cost of labor, which the Fed can most directly impact through changes in interest rates,” he said.

“Supercore inflation is still very hot, but it has started to cool down, and all the signs point to that and headline inflation returning to something more comfortable over the next 12 to 18 months,” Zandi told CNN .

But “supercore” is not a perfect meter

While it’s useful for economists to drill down to the drivers of inflation, there’s a practical downside to eliminating volatile categories like housing, food, and energy: These are non-negotiable expenses for most households.

“Across-the-board price pressures across necessities spending categories – housing, food, electricity, clothing, vehicle and furniture insurance, and home operations – show that broad improvement is still missing on the inflation front,” said Greg McBride, chief financial analyst. from Bankrate.

Therefore, there is a risk that the January CPI could disappoint, McBride warned. Some of December’s bullish headlines came from falling gasoline prices, which have since reversed.

“The CPI is likely to underscore the feeling that inflationary pressures will not fall easily or in a straight line,” McBride said. “Progress will be harder to come by than the trend of recent months would have us believe.”