Friday, March 17, 2023

Supercore Inflation is Worth Watching, but it is Probably Not a Good Policy Target

Although headline inflation continues to fall and unemployment is near a 50-year low, the Federal Reserve still faces some tricky policy decisions over the next few months. Many of these have to do with the unusual volatility of relative prices during the 2021-2022 inflation, a topic that I wrote about in a recent commentary. This piece picks up where that one left off. It focuses on the behavior of the subset of prices that constitute the so-called supercore relative to prices that are more flexible.

Supercore prices have been in the news lately because some observers think the Fed is targeting them. This commentary will argue a focus on supercore inflation may have led to a more-than-prudent degree of monetary policy tightening by late 2022 and early  2023. The fact that high interest rates appear to have been a contributing factor to the banking crisis that was touched off by the failure of Silicon Valley Bank in March only strengthens the case.

So, what is the supercore?

So, what, exactly, is the supercore? The notion of ordinary core prices is familiar enough. The core consumer price index, for example, is the ordinary CPI with the highly volatile prices of food and energy removed. The personal consumption expenditures index, a CPI alternative, also has a core version that removes the same two sectors. Measures of the supercore go further by removing still more items.