Supercore to the Rescue
Each mini-milestone in the fight against inflation has the power to move markets in the short-term, but it’s the enduring trend that matters.
One of the newer metrics that’s reported each month is the so-called “Supercore” measure of CPI, which amounts to core CPI ex-shelter. I’ve covered this in a previous column, and continue to find it a pretty wonky way to look at inflation, since it strips out all of the things that affect consumers the most. But it’s an attempt to isolate the services side of the economy and gauge whether underlying inflation is stickier than the Fed anticipates.
In April, this measure saw its lowest month-over-month gain since July 2022 (which was one month after the cycle peak in inflation). Without a doubt, this was good news. Frequently, people ask me what would need to happen in order to make me more optimistic. And part of my answer every time is that services inflation would need to show notable and sustained cooling.
Services inflation is generally thought of as the “sticky” component, the one that could prove the most stubborn to cool down. That’s why the Fed is focusing on its “Supercore” measure, and likewise why I consider services inflation the key factor that will show us whether we’re winning the fight against higher prices.
The move we saw in the April print is notable, but not yet sustained. Nevertheless, it’s encouraging and could be another data point the Fed uses as justification for a pause at its June 14 meeting.
Slower than a Speeding Bullet
Sticking with the encouraging signs we saw in this month’s report, headline CPI fell below the 5% level to 4.9% year-over-year. Although the drop was a tiny 0.1% compared to March’s reading, the mental threshold of seeing a 4 handle goes in the pros column.
One of the topics we’ve spent a lot of time parsing through is the difference between goods inflation and services inflation post-pandemic. As we know, goods inflation was skewed by supply chain issues, pent-up demand, and for some industries the change in lifestyles as everyone worked from home. The forces that affected goods inflation are also much of what the word “transitory” was born from, but I’m not going to open that can of worms again.
What was interesting in this report was that goods inflation outpaced services inflation for the first time since January 2022.
You might be wondering why on earth I’m suggesting that’s a positive. The main reason goods inflation was higher in April was due to used car prices, which saw a rebound after many months of price declines. Although we may have some scar tissue from spring/summer 2021 when used cars and truck price increases were off the charts, this little increase is not like that one and doesn’t concern me as something that will persist and grow.
As such, if used car prices are simply showing a little blip, we could expect core goods CPI to relax in coming months…bringing the overall core reading down as well.
The more important part of this is that core services inflation was less than core goods in April, and came in at 0.36% vs. 0.45% in March. Services are the sticky part we worry about and we need to see this continue to drop. But I like the way it looks this month.
Kryptonite Still Lurking
If you stopped reading this blog post at the last section you might think I’ve actually become bullish and dropped my recession concerns! Alas, that is not the case…at least not right now. I’m encouraged, and perhaps finding the possibility of a mild recession more possible, but the business cycle is not done working itself out.
I won’t make an exhaustive list of the possible sources of kryptonite still lurking in markets, but the biggest one on this topic is still the fact that inflation remains well above target, and the pace of slowing has…slowed considerably. In other words, it’s falling less. There remains a chance that it gets stuck at an elevated level, making the job of the Fed even more complicated and rendering its projections off-base. That’s certainly not what anyone is wishing for, but it’s the villain we haven’t yet defeated.
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