US Fed Chair Jerome Powell brought up an unconventional inflation metric once again this week, which seeks to explain the reason for the current high inflation, by essentially saying that the employment and wages are too high for the Fed’s comfort. The ‘supercore inflation’, as experts termed it, excludes housing prices, commodity prices, non-service prices, in addition to food and energy prices. Jerome Powell sought to express the urgent need to slow down the economy and cool off rising prices, which he believed are soaring because of increasing wages, rising labour costs and low unemployment.
Among the traditional inflation metrics, core inflation is the rise or fall in the prices of goods and services, excluding the food and energy sectors. These sectors are excluded from the metric since they are highly volatile and greatly affect the inflation numbers season to season. The new inflation gauge, supercore inflation, excludes more components; however, there is no set definition, and analysts exclude or include various components to arrive at the final figure. Some analysts believe it simply discounts the influence of housing prices on core inflation.
Why utilise supercore inflation?
While core inflation has been touted as the least volatile of the inflation metrics and the most adept at predicting underlying inflation trends, the pandemic has shifted the trends in housing prices. In an attempt to discount the volatility, supercore inflation has been introduced. Additionally, with the tight US employment data showing no signs of receding, the US Federal Chairman Jerome Powell shifted his attention to the services sector.
“It is useful to break core inflation into three component categories: core goods inflation, housing services inflation, and inflation in core services other than housing,” said the Fed Chair in a speech last year, adding, “This spending category [core services other than housing] covers a wide range of services from health care and education to haircuts and hospitality. Thus, this may be the most important category for understanding the future evolution of core inflation. Because wages make up the largest cost in delivering these services, the labor market holds the key to understanding inflation in this category.”
How does the labour market influence supercore inflation?
The White House’s Council of Economic Advisers terms supercore inflation as core non-housing services, or NHS. Since it is more labour intensive, some surmise that the services market has a hand in the current inflationary situation. While the prices of core goods have seen moderation over the past six months, core services have shown positive inflation-adjusted growth in America.
Jerome Powell’s struggle: Contain employment to control inflation
The US Federal Reserve is trying to bring the country’s inflation down to 2%, which is proving difficult with wages constantly rising. The central bank can also control this metric by raising interest rates, thus affecting the cost of labour. “To be clear, strong wage growth is a good thing. But for wage growth to be sustainable, it needs to be consistent with 2 percent inflation,” said the Fed Chair, hinting that inflation could be curbed with higher levels of unemployment.
In a recent speech to the Economic Club of Washington, Fed Chair Jerome Powell said, “The reality is if we continue to get strong labor market reports or higher inflation reports, it might be the case that we have to raise rates more,” as the annual inflation rate in the US slowed only slightly to 6.4% in January, 2023.