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
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.
Price Decreased Price Increased
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.”
Why is supercore inflation important?
Look at how the price of TVs and haircuts have changed over the past year. It’s almost like two different economies are playing out.
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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.
How is the Fed looking at supercore?
While there’s no exact definition of supercore, Mr. Powell and other senior Fed officials have been looking at core inflation in three buckets: core goods, housing services, and core services with housing removed. The third bucket is what’s been getting all the attention and is sometimes referred to as supercore.
To get a sense of why the Fed is closely watching supercore, first take a look at the Personal Consumption Expenditures Price Index (PCE), which measures the prices of goods and services within the U.S. economy.
PCE Index
This topline number has been steadily leveling off for the past few months, mostly driven by decreases in goods as supply chains catch up from pandemic-related troubles.
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Core Goods
You can see the effect of the downward movement in the price of goods when they are looked at on their own.
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Core Services
Now look at Core Services. Prices have been rising for most of the year, showing inflation in services has been stickier than the prices for Core Goods.
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Supercore
Remove housing from Core Services and you get supercore. The Fed does not include housing prices in this category because of the delay it takes for new rents and mortgages to be seen in the data.
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Supercore inflation is still elevated in part because Americans are transitioning their spending from goods to services. That means we’re moving away from stationary bicycles, books and home furnishings and towards bars, restaurants and fresh haircuts.
As you continue scrolling through below, you can see why the Fed is focused on supercore. Especially in the last few months of 2022, prices in the rest of the PCE have been falling while supercore is still elevated.
Supercore (Core Services ex. Housing)
Everything else: Goods, Housing, Energy and Food
—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.
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