US Federal Reserve Chairman Jerome Powell attends a “Fed Listens” event in Washington, D.C., on October 4, 2019.
Eric Bradat | AFP | Getty Images
A higher-than-expected CPI report rocked Wall Street on Wednesday, but markets are buzzing with a more specific price measure found in the data — the so-called super inflation reading.
Besides the overall inflation measure, economists also look at the core CPI, which strips out volatile food and energy prices, to find the real trend. The supercore metric, which also excludes shelter and rent costs from its services reading, takes it a step further. Fed officials say it's useful in the current climate, as they see rising housing inflation as a temporary problem and not a good measure of underlying prices.
Supercore accelerated to 4.8% year-on-year in March, the highest in 11 months.
If you take the readings of the past three months and disaggregate them annually, you're looking at a hyperinflation rate of more than 8%, far from the annual rate, said Tom Fitzpatrick, managing director of global market insights at RJ O'Brien & Associates. The Fed's target is 2%.
“As we sit here today, I think they're probably pulling their hair out,” Fitzpatrick said.
Persistent problem
The Consumer Price Index rose 3.5% year over year last month, above Dow Jones estimates calling for 3.4%. The data pressured stocks and sent Treasury yields higher on Wednesday, prompting futures market traders to extend expectations for the central bank's first rate cut until September from June, according to CME Group's FedWatch tool.
“At the end of the day, they don't really care as long as they get to 2%, but the reality is you're not going to get 2% sustainable if you don't get major cooling in services, prices, [and] “At this point we don't see that,” said Stephen Stanley, chief economist at US bank Santander.
Wall Street has been keenly aware of the coming trend of hyperinflation since the beginning of the year. The move higher in the gauge from January's CPI reading was enough to derail “the market's perception that the Fed was winning the battle with inflation.” [and] This will remain an open question for months to come,” said Ian Lingen, head of US interest rates strategy at BMO Capital Markets.
Another problem for the Fed, Fitzpatrick says, is a different macroeconomic backdrop to demand-driven inflation and strong stimulus payments that have primed consumers to boost discretionary spending in 2021 and 2022 while also increasing record levels of inflation.
He added that the picture today is more complex because some of the most stubborn components of service inflation are household necessities such as car and housing insurance, as well as property taxes.
“They are so afraid of what happened in 2021 and 2022 that we are not starting from the same point we started on other occasions,” Fitzpatrick added. “The problem is, if you look at all this [together] These are not discretionary spending items, [and] “It puts them between a rock and a hard place.”
The inflation problem is sticky
Complicating the situation further is a dwindling consumer savings rate and rising borrowing costs that make the central bank more likely to keep monetary policy tight “until something breaks down,” Fitzpatrick said.
He warned that the Fed will have difficulty bringing down inflation through further rate hikes because the current drivers are more stable and not as sensitive to tightening monetary policy. Fitzpatrick said the recent upward moves in inflation are very similar to tax increases.
While Stanley believes the Fed is still a long way from raising interest rates further, doing so will remain a possibility as long as inflation remains high above the 2% target.
“I think inflation will come down overall and they will cut interest rates later than we thought,” Stanley said. “The question becomes: Are we looking at something that has become entrenched here? At some point, I imagine the potential for rate hikes will come back into focus.”
