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 the rate of price change for core services, excluding housing.

“Core” inflation already leaves out food and energy. Supercore goes one step further and also leaves out housing, meaning rents and the rental value of owner-occupied homes. What is left is a wide range of services, from health care and education to haircuts and hospitality.

The term came into wide use in late 2022. On 30 November 2022, Fed Chair Jerome Powell gave a speech at the Brookings Institution in which he split core inflation into three parts: core goods, housing services, and core services other than housing.

He said the third part may be the most important one for understanding where core inflation goes next. The reason is wages. Wages are the largest cost in delivering these services, so this part of inflation follows the labor market closely.

How is the Data Calculated?

Supercore is not a separate headline release. It is worked out from price data that is already published.

The Fed’s version uses the Personal Consumption Expenditures (PCE) price index. The Bureau of Economic Analysis publishes it every month in its Personal Income and Outlays report, with detail for each spending category.

Start with core PCE services, which already leave out energy. Then take out housing. The price change of what remains is supercore.

A CPI version can be built the same way from the Bureau of Labor Statistics’ monthly CPI release: services excluding energy services, minus shelter.

Because it is a derived number, different banks and analysts can get slightly different readings, depending on the index and the weights they use.

What are the Key Numbers Measured?

When supercore data comes out, traders usually look at:

• Personal Consumption Expenditures Price Index (PCE): This measures the prices of goods and services in the US economy.
• The monthly change: how much supercore prices rose in the month. A run of high monthly readings is what worries the Fed.
• The 3-month and 6-month pace: the change over 3 or 6 months, annualized, set against the Fed’s 2% inflation target. These show a turn sooner than the 12-month figure.
• The 12-month rate: the slower figure, which shows how far services inflation still is from target.
• Wage growth: average hourly earnings and the Employment Cost Index. Wages drive service prices, so wage data often hints at where supercore goes next.

By reading these numbers together, you can judge whether services inflation is cooling, and how much pressure the Fed is under to keep rates high.

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 keeps running hot, it tells you that wage-driven price pressure has not cooled yet, even if goods prices are falling.

That makes it more likely that the Fed keeps rates higher for longer, which matters for bonds, the US dollar and stocks.

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 ways traders use a supercore reading around the release:

• Hotter than expected: a bigger monthly rise than forecast suggests the Fed may keep rates high for longer. Bond yields and the US dollar often rise, and rate-sensitive stocks often fall.
• Cooler than expected: a softer reading raises the odds of rate cuts. Yields and the dollar often fall, and stocks often rise.
• The trend, not one reading: a single month can be noisy. Traders compare the 3-month and 6-month pace with the Fed’s 2% target before they change their view.
• Wages as a cross-check: if wage growth is slowing too, a soft supercore reading is easier to believe. If wages are still hot, one soft month may not last.

By following supercore alongside what Fed officials say, traders can better judge where interest rates are heading, and how markets may react on release day.

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.

The term is recent. It came into wide use in late 2022, when the Fed began singling out services inflation outside housing as a key guide to where inflation is heading.

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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