Another way Fed economists try to filter out the noise in the data is to focus on “core” inflation measures, which are those that exclude food and energy. Whenever I write about core inflation, I get mail claiming that it’s a trick to minimize inflation. I love a good conspiracy theory, but that’s not what’s going on. In fact, when food and energy prices are falling, core inflation is higher than the headline number that includes everything. While food and energy should be included when looking at long-term price trends, the reason to leave them out when looking at short-term trends is that they fluctuate so much that they can obscure the underlying dynamics of inflation in the economy.
Lately the Fed has gotten even core-ier. Jerome Powell, the chair of the Fed, likes to monitor the P.C.E. price index for services, on the logic that goods prices reflect global market forces (such as prices of imports from China), while services prices more closely reflect domestic supply and demand. Within that, Powell likes to look at core services, excluding energy services such as electricity and gas. And within core services, he likes to further exclude housing services, since housing has its own wacky price dynamics. (Housing is considered a service even for homeowners, since the government estimates what homeowners would have to pay to live in their homes if they were renters.)
This drastically pared-down inflation measure is what economists call “supercore”: the P.C.E. price index for services excluding energy and housing. It’s not even a number the government reports monthly; economists have to derive it from the data that the B.E.A. does release in its report on personal income and outlays, such as the one that came out on Thursday. That’s the number that went up 0.6 percent in January from December. (I told you I’d explain it.)
The supercore covers a wide range of services, including health care, education and hospitality. The major factor in the cost of those services is wages, so the Fed sees the supercore as a window into what’s going on with the cost of labor. In a 2022 speech, Powell said that the supercore — a term he didn’t use at the time — “may be the most important category for understanding the future evolution of core inflation.”
So how worried should we be about the January rise in supercore? Not so worried, several economists wrote after the numbers came out. The 0.6 percent increase was “principally due to outsized gains in portfolio management prices, which reflects the recent strong performance of the stock market, and medical care services, which we think was an anomaly,” Paul Ashworth, the chief North America economist for Capital Economics, wrote in a client note.