Supercore Inflation: A Super Problem for the Fed and the Markets 

On the surface, Wednesday’s CPI, or Consumer Price Index report, showed that inflation is still a problem. However, digging deeper reveals a far more alarming situation, presenting a substantial challenge for the Federal Reserve. The Fed’s problem has a name, and the name is Supercore Inflation.  

CPI is the basic measure of inflation. It is so synonymous with inflation that it’s even the inflation basis used for Social Security cost of living adjustments (COLA). There are various components and measurements derived from CPI.

Below, we discuss some of these derivative indicators, with a particular emphasis on Supercore. We explore its significance for consumers and analyze what investors can expect, as well as potential strategies and how the Fed may deal with it.

Digging into What Supercore Inflation Means 

Demystifying supercore inflation, a much more focused CPI measure, requires digging just a couple of layers down from CPI, but it is easy to understand.  

First, CPI tracks the average price changes for a basket of goods and services consumers purchase. However, economists like to dissect the CPI further. They often quote “core CPI,” which excludes volatile food and energy prices. These two components are excluded, not because of the economy, but instead because of weather or other factors.

Taking them out of the calculation provides a clearer picture of underlying inflation trends. Supercore inflation takes this analysis a step further by stripping out even more categories, like shelter and rent costs, to isolate the stickier price changes within the services sector. 

Why Supercore is Super Concerning 

Here’s the problem: the supercore inflation rate is currently well above anything desired by the Fed, and there is little they can do about it. This is why March CPI numbers showed supercore inflation hit a 4.8% year-over-year pace, the highest pace in 11 months. This is significantly above the Federal Reserve’s inflation target of 2%. Experts like Tom Fitzpatrick, managing director of global market insights at R.J. O’Brien & Associates, point out that the recent trend suggests an annualized pace of price increases exceeding 8%. This could easily put the Fed completely on hold if it was considering lowering rates. 

The implications are serious because the Fed’s tools to control supercore inflation are limited. While other inflation measures are mostly driven by discretionary spending, supercore is harder to make an impact on.

The rising-price problems shown in the CPI are household essentials, including car and home insurance, and property taxes. The Fed typically resorts to raising interest rates, but in this scenario, it’s not particularly effective. This is because the service sector CPI components represent expenses that households can’t easily reduce. In this way, they are like tax increases, taking cash out of consumers’ savings and not giving them anything more for it. 

Impacts of Supercore Inflation

The first impact of supercore inflation is that consumers being squeezed by paying more for the same service. Consumers are seeing their purchasing power diminish as essential expenses rise. This translates to less money available for discretionary spending, potentially hurting businesses reliant on non-essential purchases. Investors are also taking notice. The recent CPI data, particularly the supercore reading, sent stock markets lower and Treasury yields higher.

The second impact is that the stock market is now unsettled for a number of reasons. One is, that if consumers have less discretionary income, spending will slow throughout the economy. Another is that the expectation of a rate cut this year is all but off the table. The stock market expects three rate cuts, each at least 25 basis points. There are new discussions amongst analysts about the next rate move being higher. The stock market is getting increasingly concerned about the Fed’s ability to contain inflation and do it without triggering a recession. 

Key Takeaway

Supercore inflation presents a complex challenge. It pinches consumers and raises questions about the effectiveness of traditional monetary policy tools. While the Fed may eventually bring inflation down, the path could be bumpy. Investors, particularly those in sectors sensitive to consumer spending, should be mindful of this latest surprise.

Understanding supercore inflation and its potential consequences can help individuals and investors navigate this unfolding economic climate.