Supercore Inflation Stays Elevated Ahead of Likely Fed Rate Cut

A key inflation metric that Federal Reserve Chair Jerome Powell says is “the most important category for understanding the future evolution of core inflation” remains stubbornly high ahead of the U.S. central bank’s likely policy pivot this month.
Supercore inflation—a price measurement of services excluding food, energy, and housing—rose 0.3 percent in August, the largest monthly increase in four months. It was also up 4.5 percent from a year ago, and it has doubled from levels observed before the coronavirus pandemic, according to financial data company Bloomberg Finance’s tracker of CPI supercore inflation.
Though supercore is down from its more than 6 percent peak at the end of 2022, it is not making as much progress as the broader consumer price index (CPI).
This is because while core goods inflation has tumbled in 14 of the last 15 months and is up 1.7 percent over the last year, services inflation continues to be a challenge for the U.S. economy.
For the monetary authorities, supercore can better show how labor, the largest expense for businesses, influences inflation trends. Services control the economic landscape, and a significant share of U.S. payrolls is dominated by various industries that serve consumers, such as leisure and hospitality, health care, retail, and finance. As a result, service-sector wages can sizably affect the CPI.
Of course, says Christopher Neely, a St. Louis Fed economist, supercore is one of many inflation gauges.
A chorus of economists say the task of defeating inflation is unfinished.
“We expect inflation will pick up next year alongside a resurgence of macroeconomic activity and likely loosening of monetary policy,” he said. “We may see an uptick in spending on capital goods that could increase pricing pressures, but the effect will likely take time to develop.”
The first is medical care, which is “unaffected by the broader market trends,” they said, adding that the “sector’s inflation is often sticky, reflecting structural issues within health care pricing and policy.”
Shelter costs, including rent and owner’s equivalent rent, increased in the August CPI report. The shelter index advanced by 0.5 percent and is up 5.2 percent from the previous 12 months. The subcategories of rent and owners’ equivalent of rent also jumped 0.5 percent from July to August.
“This resurgence is particularly concerning as housing costs constitute a large portion of the CPI basket, directly influencing the headline number,” they said.
Finally, transportation services inflation is another challenge, rising 0.9 percent monthly in August and up 7.9 percent year over year.
“Despite temporary relief in fuel prices, the overall cost of transportation services has not decreased commensurately, indicating underlying inflationary pressures,” the economists said.
“The time has come for policy to adjust,” Powell said. “The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.”
Investors overwhelmingly bet the first policy pivot will occur at the September Federal Open Market Committee meeting. The debate in the futures market and among economists is whether the Fed will follow through on a quarter-point or half-point rate cut.
Byron Anderson, head of fixed income at Laffer Tengler Investments, noted that bond markets have priced in 10 rate cuts over the next year.
Market watchers will examine the updated Summary of Economic Projections, a guide to the direction of policy and economic data.
Fitch’s Coulton said the Fed is likely to adopt a slow-and-steady approach to loosening monetary policy because “there is still work to be done in reducing services inflation.”
ING economists disagree, anticipating a more aggressive Fed at the start, with 100 basis points worth of cuts by year’s end.
Monetary policy officials have warned that easing prematurely could resuscitate inflation.
Euro Pacific Capital Management economists say that if the Fed’s rate-cutting endeavors fuel inflation, the central bank would have to pivot to tighter monetary policy, “assuming the Fed has the courage to make such a move.”
The Fed’s next two-day policy meeting is scheduled for Sept. 17 and 18.