Niagara University economist comments on inflation reportKrieg Tidemann, Ph.D., professor of economics at Niagara University, issued the following comments on February’s inflation report.
The February inflation report was mostly inline with economists’ expectations, containing both positive and negative signals for the Fed’s ongoing efforts to bring inflation closer to its 2% target.
In terms of positive developments, while much of the Fed’s focus is on core CPI (prices for all items except food and energy), food prices grew at a slower rate. Some notable food items (meat and eggs) also saw their prices fall after notable increases over the past few quarters. Furthermore, it was good to see no month-over-month rise in core goods prices, especially after the January CPI report included an unexpected rise in goods prices. This contributes to a hopeful conclusion that unsustainable inflationary trends in the prices of goods (omitting food and energy) are behind us, due to the resolution of supply chain concerns and adaptation to geopolitical concerns like the Ukraine war.
However, as was evident in today’s report, the main driver of persistent core inflation lies in the service sector. Prices for core services rose faster (0.6% month-over-month) in February than January, reflecting the tight labor market that continues to support wage growth above pre-pandemic levels. To the extent the Fed is looking for evidence that its interest rate increases are avoiding the worst case of a wage-price spiral, we should expect today’s report to solidify our expectations that the Fed will raise interest rates by at least a quarter of a basis point next week.
Dr. Tidemann also addressed the relatively new concept of “supercore inflation,” which refers to prices that rise when workers get paid more for their services, such as haircuts, electrical work and gardening. Those prices are typically less volatile than food and energy and can better indicate the direction of prices in the US economy:
Supercore inflation is a relatively new concept that derives from an older logic in alternative versions of the CPI. The BLS has always reported both the all items and core CPI, with the later price index (core CPI) stripping away fluctuations in food and energy prices. While food and energy are both key determinants of inflation’s bite into consumer living standards, the prices of food and energy are notoriously volatile. This volatility can make it difficult to determine the directional trends in aggregate price changes, such as determining whether or not the Fed’s actions to raise interest rates are sufficient to reduce inflation down to its target levels.
Supercore CPI goes a step further, taking core CPI and additionally removing the price of housing and shelter when computing the price index. The rationale for removing housing follows a similar logic to core CPI’s aim to better measure trends in price changes. Slow adjusting housing costs are a lagging indicator of inflation, which could obscure underlying shifts in the price level for most other goods within core CPI. For instance, shelter prices were a major contributor to rising core services inflation in the February report, growing at a faster rate than many other core services categories.
While there are many competing measures of supercore CPI, a version distributed by Bloomberg indicated that supercore prices did rise at a faster rate in February (0.43% month-over-month) than January. This trend in supercore CPI only adds to the conclusion of the Fed electing for a 0.25 to 0.5 basis point hike to the Federal Funds Rate at its next meeting.
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