Federal Reserve Chair Jerome Powell attends a “Fed Listens” event in Washington, DC on October 4, 2019.
Eric Baradat | AFP | Getty Images
A hotter-than-expected consumer price index rocked markets on Wednesday, but markets are raving about an even more specific price indicator included in the data – the so-called supercore inflation reading.
In addition to the headline inflation measure, economists also look at the core CPI, which excludes volatile food and energy prices, to determine the true trend. The Supercore indicator, which also excludes accommodation and rent costs from its services, goes one step further. Fed officials say this is useful in the current climate as they view elevated housing inflation as a temporary problem and not as good an indicator of underlying prices.
Supercore accelerated to a 4.8% year-on-year pace in March, its highest in 11 months.
Tom Fitzpatrick, managing director of global market insights at RJ O’Brien & Associates, said if you take the last three months of readings and annualize them, you see a supercore inflation rate of more than 8%, a far cry from that Federal Reserve’s 2% target.
“As we sit here today, I think they’re probably tearing their hair out,” Fitzpatrick said.
An ongoing problem
The CPI rose 3.5% year-on-year last month, beating the Dow Jones estimate of 3.4%. According to CME Group’s FedWatch tool, the data pressured stocks, pushed Treasury yields higher on Wednesday and prompted futures traders to extend expectations for the central bank’s first interest rate cut from June to September.
“Ultimately they don’t care as long as they get to 2%, but the reality is that unless service prices are significantly reduced, you won’t get to a sustainable 2%.” [and] At this point we are not seeing it,” said Stephen Stanley, chief economist at Santander US
Wall Street has been keenly aware of the supercore inflation trend since the start of the year. A rise in the measure over January’s consumer price index was enough to undermine the market’s “perception that the Fed is winning the battle against inflation.” [and] “This will remain an open question for months,” said Ian Lyngen, head of U.S. interest rate strategy at BMO Capital Markets.
Another problem for the Fed, according to Fitzpatrick, lies in the different macroeconomic backdrop of demand-driven inflation and the robust stimulus payments that enabled consumers to increase their discretionary spending in 2021 and 2022 while fueling inflation to record levels.
Today, he added, the picture is more complicated because some of the most persistent components of service inflation are household needs such as auto and home insurance and property taxes.
“They are so afraid of what has happened in 2021 and 2022 that we are no longer starting from the same point as we have been on other occasions,” Fitzpatrick added. “The problem is when you look at it all [together] These are not discretionary spending items [and] it puts them between a rock and a hard place.”
Persistent inflation problem
Complicating the situation are falling consumer savings rates and higher borrowing costs, increasing the likelihood that the central bank will keep monetary policy tight “until something breaks,” Fitzpatrick said.
He warned that the Fed will have a hard time reducing inflation by raising interest rates further because current drivers are more persistent and will not respond as strongly to tighter monetary policy. Fitzpatrick said the recent upticks in inflation are more akin to tax increases.
While Stanley believes the Fed is still a long way from raising rates again, it remains a possibility as long as inflation remains above its 2% target.
“I think broadly inflation will come down and they will cut rates later than we thought,” Stanley said. “The question is, are we dealing with something that has taken hold here? At some point I imagine the possibility of interest rate hikes will come back into focus.”
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2024-04-10 19:29:09
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