Strong supercore inflation in March was a factor that caused financial markets to reassess their expectations about US interest rates. In this edition of Infocus, Chief Economist Stefan Gerlach and Senior Economist GianLuigi Mandruzzato look at the differences between supercore inflation as measured by the CPI and the PCE indices. The implications for future inflation are investigated.
The March US CPI release encouraged investors to reassess the likelihood of future fed rate cuts and pushed Treasury bond yields higher. A key factor was the unexpectedly strong increase in a measure termed supercore inflation: that is, a measure which excludes all goods prices, food and energy prices, and housing costs. This measure represents about a quarter of the overall CPI measure and about half of the PCE deflator measure (the latter being the Fed’s preferred measure of inflation).
The significance of supercore inflation
Supercore inflation first attracted investor attention after Chairman Powell stated in a speech on November 30, 2022, that it “may be the most important category for understanding the future evolution of core inflation”.
Powell’s comments referred to the PCE measure of inflation, data for which are released towards the end of each month. CPI inflation data are released sooner – around mid-month – and receive a great deal of attention in financial markets. Although supercore CPI measures are not officially reported, they can be constructed. According to our calculations, supercore CPI inflation was 5.01% year-on-year in March 2024, the highest rate since April 2023.
Supercore inflation as captured by the CPI and PCE methodologies can be quite. Since January 2021, supercore CPI inflation has been much more volatile than supercore PCE inflation. Furthermore, while supercore CPI inflation has risen sharply since mid-2023, supercore PCE inflation has continued to moderate. These two factors alone suggest the need for caution about reading too much into supercore CPI calculations.
Both of the supercore measures exclude shelter (housing) costs, but housing costs are an important influence on core inflation. Housing inflation responds to changes in house prices, but normally with quite a long lag.
That is because the stock of rental housing, and any associated rental changes, tends to be slow to turn over. It is thus unsurprising that housing inflation lags trends in US house prices. In that sense, the fact that supercore inflation disregards housing price inflation, may mean it provides a timelier evaluation of underlying inflation pressures.
Does supercore foretell the future?
But how valid is Powell’s claim that supercore inflation is the most important category for understanding the future evolution of core inflation? In the Appendix we provide an analysis of the relationship between headline, core and supercore inflation.