Forget Core CPI, Market Pros Are Searching for Supercore Inflation
More investors are paying greater attention to services inflation and labor-market data
By Sam Goldfarb, The Wall Street Journal, Jan. 11, 2023
…
The root problem for investors is that inflation itself has become more complicated. Core goods inflation has turned negative in recent months, thanks to increased supply of many products and reduced demand. But services inflation has remained elevated—the result, many argue, of a stubbornly hot jobs market and escalating labor costs…
Adding an extra dose of complexity, Mr. Powell has helped convince many investors that the labor market is the key to understanding the direction of inflation, making inflation data itself arguably less important…[end quote]
The markets are acting as if inflation is pretty much behind us. The Fed warned in its last notes that market optimism has led to lower long-term interest rates that is actually making the Fed’s job of controlling inflation harder. That could lead it to raise the fed funds rate more and/or keep it high longer – but the markets are ignoring that.
The PCE index that the Fed watches is different from the CPI, which is used to adjust I-Bond and TIPS yields.
What we experience is inflation in the whole basket of goods, not a subset like “median”, “core”, “sticky”,”goods”,”services”. Consumers experience inflation in the entire basket of CPI and PCE inflation, so I am skeptical of too much cherry-picking of sub-baskets of goods and services.
The certain subsets are watched because they are less volatile. But, the subsets are all quite correlated: the gold and black lines fluctuate in correlation with the blue line and over history tell the same story. They mostly go up and down together except with different amplitudes.
Too much of a hit piece by the WSJ. Those who want Supply Side Econ policies never fully give up. No matter how bad supply side econ has been. No one will ever discuss wanting supply side econ these days. The reputation is complete failure. Not the businessmen but the US economy is left high and dry by supply side econ. We have $31 trillion in debt, thanks no thanks.
The labor inflation is slower than the overall inflation rate. Yes goods are not as inflationary. I have not seen that goods are falling in price but it would not surprise me. That is the goal. Manufacturing in the US and Mexico should be a deflationary force. Can only bang that drum endlessly because demand side econ is so great for our country.
Frankly the WSJ is just issuing a propaganda piece claiming labor is a problem.
You have already documented inflation for five months is running around 2.5%. The goal is 2%.
Not true. At all. If you have a criticism, address it to Powell and the rest of the fed. The WSJ is simply reporting in this case.
Excerpts from the fed press conference a month ago -
“The third piece, which is something like 55 percent of the index, PCE core inflation index, is non-housing-related core services. And that’s really a function of the labor market, largely. The biggest cost, by far, in that sector is labor. And we do see a very, very strong labor market, one where we haven’t seen much softening, where job growth is very high, where wages are very high. Vacancies are quite elevated, and, really, there’s an imbalance in the labor market between supply and demand. So that part of it, which is the biggest part, is likely to take a substantial period to get down.”
and
“But there’s an expectation, really, that the services inflation will not move down so quickly, so that we’ll have to stay at it, so that we may have to raise rates higher to get to where we want to go. And that’s really why we are writing down those high rates and why we’re expecting that they’ll have to remain high for a time.”
You are overstating what the FED is talking about. Labor inflation is currently down. The amount of labor inflation in some quarters is higher than what the FED wants that is a different matter.
Powell is stating that but he may well be somewhat wrong. Labor inflation during this part of the cycle is good for business. The consumer and saver base in the US is rising. Powell needs to be careful about not being outdated. The economy needs a wealthier middle class. That involves higher labor rates. As I was saying this view by the WSJ based on some of Powell’s comments barely within the context of Powell’s full remarks is a hit piece.
We can go in the wrong direction again and rack up a lot more debt with a slow growing economy. We can use most workers with little regard if we are going to get into being stingy because misinformation is proffered by the WSJ about the “problem”.
Inflation rates on all fronts are down.
Powell was expecting to raise rates some more this year. He is also in part using information to talk down the inflation rate. FED information front runs business decisions. This makes FED decisions more powerful than sudden moves without letting corporate planners know in advance.
The reality of the cycle pay is going to rise. In that the report is correct it is central to decisions by the FED. The difference being a goodly rate of pay rise means a much larger US economy. A smaller rate of labor inflation means much less US GDP growth…and ironically worse inflation very often. Inflation based on inputs to factories while the goods created are relatively less affordable. That is counter productive.
I can not expect the WSJ to discuss economic theory. I can not expect the WSJ to be unbiased and why should I? But I will discredit the WSJ.
LOL. That is literally a direct quote from the fed statements a month ago. I didn’t add or subtract or change a single word. And I supplied the link for you to see for yourself.
I agree with this. He may be wrong. Or he may simply be using the jawboning technique in the final months of tightening. Jawboning has been known to be quite effective in many cases.
I don’t think so. The very core of the thought process in recent months is “well, goods inflation is dropping due to easing of supply chain issues, but services inflation is not dropping fast enough and services are usually associates with labor which means a danger of wages rising too quickly.” Hence higher for longer.
This is what I am talking about the impression it is not dropping fast enough. How much does it have to drop? You are quoting the FED and WSJ. This is where they have left you, what are the data points?
Answering my own questions the rate is 5.7% annualized.
But there is a good reason for that…the core rate lagged the CPI rate. Meaning Y/Y comparisons have lower rates the previous year for the core rate and higher rates the previous year for the CPI rate.
Note the service rate in January 2022 was much lower.
I didn’t quote the WSJ, only the fed december meeting notes and call transcript.
Since the fed makes the decision regarding interest rates, it doesn’t matter what we think about services inflation, and it doesn’t matter what the numbers are. All that matters is that it isn’t slowing fast enough for the fed to be satisfied. Therefore it has to drop enough such that the fed is satisfied and they stop raising rates. That’s the only data point that matters for now.
There is one [small] silver lining here. When the next real recession hits, the fed will have much more “ammo” if rates do indeed remain higher for longer.
You just need one data point? But the entire context of getting that one data point does not matter to you? At least that is how I just read that.
Have you had any econ classes or picked up a few text books on econ? The science spreads out across many factors to determine what matters. It is not decided by one factor. Figuring out fiscal and monetary policy is the topic. It is obscured by partially explained and unexplained policy decisions. You need all of that context. Or at least I need all of that context. There is no one magic number.
yep the FED is only citing service inflation. Powell was discussing more than that.
The bigger issue is normalizing rates at a level to cut off inflation while keeping a moderate level on taxation that allows some inflation and feeds fiscal spending.
We need the federal government spending for growth. There are intelligent ways to do that. The IRA is one group of good moves. Another would be more guaranteed loans for lower cost housing. Stepping stones to greater middle class wealth.
