What is Supercore Inflation and How to Trade it?

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The Federal Reserve in the US is now using “supercore inflation” to guide interest-rate policy.

This narrow measure of inflation comprises the prices of services (e.g. barbers, lawyers, plumbers) excluding housing and energy prices.

The Fed is paying close attention to services as they tend to be driven by the cost of labor, which the Fed can more easily control with interest rates, whereas the price of goods are more affected by global factors.

The focus on supercore is expected to affect the Fed’s decisions on interest rate increases.

In this blog post, we will delve into the origin, calculation, and key numbers of supercore inflation, and explain how this data is relevant to you as a trader or investor.

What is Supercore Inflation and its Origin?

Supercore inflation is a concept in economics that refers to a persistent increase in the prices of goods and services that are considered necessities for a particular population.

It is often used to describe situations where the prices of essential goods, such as food, healthcare, and housing, increase faster than overall inflation.

The origin of the concept of supercore inflation is not well documented, but it is believed to have emerged in the late 20th century as a way to describe the experience of populations in developing countries who were facing rapid increases in the cost of living, particularly for essential goods and services.

The concept is used to highlight the disproportionate impact of inflation on low-income households and to highlight the need for economic policies that address these issues.

How is the Data Calculated?

The data for supercore inflation is typically calculated by measuring the change in prices of a basket of goods and services that are considered essential for a particular population.

This basket is created based on a survey of household spending patterns and may include items such as food, housing, healthcare, transportation, and education.

The change in the prices of these items is then compared to the overall rate of inflation to determine whether prices are rising faster or slower for essential goods and services.

To calculate supercore inflation, national statistical agencies typically use consumer price indices, which are measures of changes in the prices of a basket of consumer goods and services over time.

The basket of goods and services used in consumer price indices is updated periodically to ensure that it reflects the current spending patterns of households.

The calculation of supercore inflation can also be done by private research institutions, think-tanks or economists, who use the same data sources as national statistical agencies and may use slightly different methodologies to arrive at their results.

The goal of calculating supercore inflation is to provide a more nuanced understanding of the impact of inflation on different segments of the population.

What are the Key Numbers Measured?

In measuring supercore inflation, several specific numbers are typically looked at, including:

• Personal Consumption Expenditures Price Index (PCE): This measures the prices of goods and services in the US economy.
• The rate of change in prices of essential goods and services: The rate at which prices of the basket of essential goods and services are increasing or decreasing is an important indicator of supercore inflation.
• The comparison with overall inflation: The difference between the rate of increase in the prices of essential goods and services and the overall rate of inflation is a key metric in determining supercore inflation. If the rate of increase in the prices of essential goods and services is higher than the overall rate of inflation, it is considered an instance of supercore inflation.
• The impact on low-income households: The extent to which supercore inflation is affecting low-income households is another key metric. This is often determined by comparing the rate of increase in the prices of essential goods and services for low-income households with the rate of increase for higher-income households.
• The duration of the increase: The length of time over which the prices of essential goods and services have been increasing faster than overall inflation is another important metric in determining supercore inflation.

By looking at these specific numbers, economists and policymakers can gain a better understanding of the impact of inflation on different segments of the population and can develop policies to address the effects of supercore inflation on low-income households.

How is this Data Relevant to Traders and Investors?

The data on supercore inflation is relevant to traders and investors because it can provide valuable insights into the current state of the economy and can help inform investment decisions.

Understanding trends in supercore inflation can help traders and investors anticipate changes in consumer behavior, interest rates, and monetary policy, which can all have a significant impact on financial markets.

For example, if supercore inflation is rising faster than overall inflation, it can signal that consumers are facing increasing financial pressures and may be more likely to reduce their spending on discretionary items.

This, in turn, can affect the demand for certain goods and services and may lead to changes in their prices.

Investors may also use data on supercore inflation to make decisions about investing in specific industries or sectors.

For example, if supercore inflation is affecting the prices of essential goods such as food, healthcare, and housing, it may be a sign that companies in these industries are poised for growth, and investors may want to consider investing in them.

Furthermore, trends in supercore inflation can also impact interest rates, which can have a significant impact on bond prices.

If supercore inflation is rising, central banks may raise interest rates in an effort to control inflation, which can have a negative impact on bond prices.

Hence, data on supercore inflation can provide traders and investors with valuable insights into the current state of the economy, and they need to be aware of these trends and take them into account when making investment decisions.

News Trading on Supercore Inflation Data

Here are some specific examples of how traders might use each of the data points from the supercore inflation report to make trading decisions:

• The rate of change in prices of essential goods and services: Traders can use the rate of change in the prices of essential goods and services to assess consumer spending patterns. If the prices of essential goods and services are increasing rapidly, it may signal that consumers are under financial pressure and are reducing their spending on discretionary items, which could negatively impact certain industries or sectors.
• The comparison with overall inflation: Traders can use the difference between the rate of increase in the prices of essential goods and services and the overall rate of inflation to assess the health of the economy. If the rate of increase in the prices of essential goods and services is higher than the overall rate of inflation, it may signal that the economy is facing challenges and that consumer confidence is declining. This could negatively impact financial markets and lead to a decrease in stock prices.
• The impact on low-income households: Traders can use the data on the extent to which supercore inflation is affecting low-income households to anticipate changes in consumer behavior. If low-income households are facing increasing financial pressure, they may reduce their spending, which could negatively impact certain industries or sectors. Traders may also use this data to identify potential investment opportunities in companies that serve low-income households, such as food and healthcare companies.
• The duration of the increase: Traders can use the length of time over which the prices of essential goods and services have been increasing faster than overall inflation to assess the sustainability of the trend. If the trend has been in place for a prolonged period of time, it may signal that the increase in the prices of essential goods and services is likely to persist, which could negatively impact financial markets and lead to a decrease in stock prices.

By understanding the trends in supercore inflation and the factors driving these trends, traders can make more informed investment decisions and maximize their returns.

Concluding Thoughts

In summary, supercore inflation is a valuable data point to keep an eye on if you are a trader or investor.

This narrow measure of inflation, which focuses on the prices of services excluding housing and energy prices, is gaining prominence as the Federal Reserve in the US uses it to guide interest-rate policy.

By tracking trends in supercore inflation, you can gain valuable insights into the current state of the economy, anticipate changes in consumer behavior, interest rates, and monetary policy, and make informed investment decisions.

With its roots tracing back to the late 19th century, supercore inflation is a well-established concept that provides a more nuanced understanding of the impact of inflation on different segments of the population.

Now that I have covered all about the importance of supercore inflation, is it something that you will add to your trading toolbox?

Let me know in the comments below.

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Spencer Li

Spencer is an avid globetrotter who achieved financial freedom in his 20s, while trading & teaching across 70+ countries. As a former professional trader in private equity and proprietary funds, he has over 15 years of market experience, and has been featured on more than 20 occasions in the media.